Subsidizing Costly Power

Worth A Look, Energy, Frontier Centre

The California electric power system unfairly subsidizes costly peak power use from off-peak users, says Nobel prize-winning economist Vernon L. Smith.

  • In California and elsewhere, the demand for electricity at peak levels is more than twice the demand of off-peak levels — although the additional cost of producing a kilowatt at peak demand can be three to 10 times the off-peak cost.
  • Under current regulatory pricing policy, consumers pay rates based on the average hourly cost of energy and industry capital investment; as a result, consumers pay much less for peak utility power than it costs, and much more for off-peak and weekend energy than it costs.
  • As a result, the utility earns an abnormally high profit from off-peak consumption and loses money from peak sales.
  • If energy companies were allowed to vary the price of retail power according to actual costs, consumers would be able to pocket the difference in production costs by shifting energy usage away from peaks and toward troughs.

    Furthermore, separating the market for energy and the market for delivery (by the monopoly local utility) would create a competitive environment that benefits customers while opening opportunities for new market entrants and the development of new technologies.

    Source: Vernon L. Smith (George Mason University) and Lynne Kiesling (International Foundation for Research in Experimental Economics), “Socket to California,” Wall Street Journal, November 10, 2003.