The Problem of Over-Regulation

Imagine if your corner gas station had to obtain government approval every time it raised or lowered the price of a gallon of unleaded. While that may seem like a great way to keep gas prices low, in reality, such policies, enacted as a result of OPEC’s embargo, caused the long gas lines of the 1970s. Thus, a situation that would have seen price increases and subsequent conservation on the part of consumers instead resulted in gas not being available at all.

Indeed, as Nobel Award-winning economist Friedrich A. Hayek pointed out decades ago, government-run economies are doomed to failure because governments don’t have enough information to make pricing decisions in a marketplace.

The situation relating to PNM and its recent difficulty in obtaining rate increases from the Public Regulation Commission is not altogether different. Energy prices have risen dramatically in recent years while at the same time PNM has been forced to invest in wind and solar in order to fulfill state-mandated renewable energy standards 10 percent of our electricity must come from these “renewables” by 2011. But rates have not risen for 20 years.

The Rio Grande Foundation is by no means a shill for PNM, though. In fact, the organization does not take a position one way or another on PNM’s proposed 14.7 percent base rate increase or any other change in the rates charged by the utility. Instead, we’d like to see a competitive marketplace in which PNM is just one of many utilities competing to provide the best service at the lowest price.

Unfortunately, until New Mexico deregulates its utilities to the point that consumers can choose their utility and utilities can adjust their rates without the approval of the government, this will not occur.

While painted as a boon for utilities, true deregulation would actually be most beneficial for consumers. For starters, it would encourage more efficient pricing, thus leading to lower prices in the long term. Building new power plants costs millions and even a billion or more dollars depending on the type. Yet, much of this power is necessary only when electricity usage rises to “peak” levels on hot days when businesses and homes are running their air conditioning and otherwise using maximum power.

PNM has begun to address this issue with its “Power Saver program,” which offers financial incentives for consumers to cut back electricity usage at peak times. This program is one market-friendly way to cut costs by eliminating the need for future power plants. Of course, this is also good for the environment. While PNM is finally rolling this program out, other utilities have gone far beyond it in terms of improving efficiency and cutting costs.

Among the most innovative utilities operating in the deregulated state of Maryland, Baltimore Gas and Electric recently began an efficiency/conservation program that will generate $42 million in revenue for the utility over the next thee years by enabling the company to identify outages more quickly and bill customers based on more accurate information. Ultimately, the utility hopes to avoid having to invest in additional power plants until absolutely necessary.

Dynamic pricing expands on PNM’s “Power Saver Program” by allowing the utility to raise prices during peak times and reducing prices during off-peak times. Through the use of market incentives, consumers would be encouraged to shift their energy usage to those days and hours when prices are lowest. Since power plants run 24 hours a day with off-peak power often going to waste, using incentives to shift usage is good for consumers, utilities, and the environment.

At this point, there is no way to tell if PNM’s rate hike request is economically justified because the utility is not operating in anything resembling a market. However, it is clear that we’d all be better off if the political process were replaced with economic decisions made by utility customers. Only then will we know if rate hikes are justified or the result of poor management.

Paul Gessing is president of the Rio Grande Foundation, a research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.