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Thursday, June 9, 2005

The Costs of Regulation to Ratepayers
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Here in Colorado, our local utility, Xcel Energy, has agreed to use union labor in building a new coal-fired power plant near the union-heavy town of Pueblo. For Xcel, this was a rational decision for a number of reasons. First, it gets the plant built without labor problems and the quicker they get the plant into service, the sooner they can begin recovering their costs. Second, it gets to pass through the increased labor costs to ratepayers, thus Xcel's incentives to cost economize on labor are much different than that of a normal business. The incentives to economize aren't non-existent; they are just much weaker than with a business in a competitive market.

For ratepayers, the union labor is obviously less of a good deal. They have to pay inflated union labor costs in their energy bills. What's more, I doubt the Public Utility Commission has the political wherewithal to challenge higher cost union labor wages as "imprudent" and thus disallowable in rates. (Plus, the likelihood of state employees, who are unionized, challenging the prudency of unionized labor costs seems, well, let's just say mighty low.)

I suspect that one of the greatest advantages independent power producers enjoy over traditional vertically-integrated utilities is lower, non-union labor costs. This has certainly been true of other industries where regulation has given way to competition. Though it took about 20 years, the final unionized trucking company finally went bankrupt a few years ago, beaten by non-union trucking competition with lower labor costs. (See this for an interesting story on one non-unionized trucking company's triumph under competition.)

The electric industry is more complex and the gains from the stylized "competition" that regulators have thrust onto the industry are more ambiguous. Nevertheless, regulated industries -- along with the government -- are one of the last bastions where unions thrive and have real leverage. Competition in the electric industry -- if it progresses under the properly designed institutional rules -- will inevitably erode the unions' power. For unions and union members, this is a bad thing; for consumers, it is a good thing.

Until then, feel free to come to Colorado and pay some of our union-labor-inflated electrcity rates.

P.S. Maybe I'll try to coax my friend Jon Caldara at the Independence Institute to take some time out defending our state's Taxpayer's Bill of Rights, and tilt at this windmill.

posted by Ray Gifford @ 12:34 PM | Electricity

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