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Markets Should Drive State’s Energy Industry

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Markets Should Drive State’s Energy Industry

Xcel Energy is getting a lot of grief over its new “tiered” rate increase—a.k.a., the air-conditioner tax—but the criticism is somewhat misplaced. It’s impossible to assign complete responsibility to Xcel for this ham-handed energy fee, because in reality the state is calling the shots in an effort to control Coloradans' energy use so that it more closely reflects state-sanctioned “social values.”

Colorado's electricity industry has been socialized since the early 20th century. At the time, politicians determined that the electricity business is a “natural monopoly,” despite the existence of robust competition among electricity distributors. The ironic solution was a government-certified monopoly. 

From 1907-1930, state legislatures across the country created commissions with the regulatory power to outlaw competition among utilities and set electricity rates for consumers. In exchange for a monopoly within a given service area and a “reasonable” profit, electricity companies allowed the state to dictate business decisions.

For politically-connected electricity barons, a government-granted monopoly was a great deal, because it eliminated competition. For politicians, it was an even better deal, because they gained the power to control energy and manipulate behavior.

According to its Web site the Colorado Public Utilities Commission exists to serve “the public interest by effectively regulating utilities and facilities so that the people of Colorado receive safe, reliable, and reasonably-priced services consistent with the economic, environmental and social values of our state.” 

When “social values” is in the mission statement of an organization in control of energy, consumers are in trouble because their desires may conflict with the state-sanctioned “social values.” 

As with all market manipulations, the trouble with PUCs is misbegotten incentives. In free markets, companies compete to best meet consumer demand. Politicians, however, compete to win votes. History demonstrates that political calculations are a poor substitute for a viable business plan.

Xcel is imposing this air-conditioner tax in order to decrease demand for electricity during periods of peak use, thereby averting the need for expensive backup power. But the most efficient manner to achieve this goal is to simply price electricity what it costs in real time, so that all consumers use less electricity during periods of high demand and high prices. 

The “tiered” rate increase allows the PUC to penalize Coloradans who use more than the ridiculously low threshold of 500-kilowatt hours (average is 687). 

Most people expect the state to manipulate behavior through the tax code, but not through a basic necessity such as power. And that’s why people are angry. 

Colorado’s electricity industry has been centrally planned since Woodrow Wilson was in the White House. During that time, competition among electricity providers has been illegal. Yet without competition, there is no incentive for improvement, which is why the American electricity industry hasn't changed fundamentally in a hundred years. 

In reality, state-control led to the predicament of seasonal peak power demand straining an antiquated grid, proving that 20th century technology can’t meet 21st century needs. 

There is a better way, but the system has to change. By getting politics out of the energy business, Colorado would free the electricity market, and unleash innovation, the engine of technological progress. Only then will Colorado ensure what should be the mission of any energy provider – reliable and affordable energy – regardless of the state’s version of “social values.”