Last week, a colleague and myself spoke to the Fort Pierce Utilities Authority (FPUA) Board about their recent proposed rate adjustments. I was informed of the proposed rate adjustment a mere days before the FPUA’s vote by a notice mailed of the public hearing.
The chart on the public notice indicated that the electrical rates were to decrease but the rates for water, wastewater, and natural gas were to increase. The chart indicated a sample residential customer in which the total rate adjustment was a net savings of $0.34 or less than two-tenths of one-percent. This rate adjustment is a phenomenal approach. To understand it, many factors must be put into context.
It is important to note that the FPUA is supposed to operate as a business but lacks the ability to do so, namely by a lack of competition. This lack of competition is from the establishment of a franchise monopoly by government decree. Competition is good for a prosperous society. Competition drives producers to find innovative, efficient, and productive techniques to satisfy consumer demand resulting in higher quality goods at lower prices. When consumers are forced to purchase from an entity protected by government decree, we always see the same results of largesse, waste, and high prices.
FPUA customers have been paying above market rates for electricity for many years because of the negligent prolonged hedging of purchases by the FPUA through the Florida Municipal Power Association. So, when the old purchases for electricity, at all time high prices, are due to fall off the books, rates for the other services provided by the FPUA now need to be increased by almost the entire savings from the electricity decrease. They also project a steady rate increase over the next five years. The reason to justify the increase for the other services is “they need to be self sustaining.” If they are not self-sustaining, it is a service they should not be providing. This is usually where other arguments are offered such as “it serves the public’s interest” or “it’s a natural monopoly because of the complexities involved or economy of scale.” We can discuss more on these arguments later.
Market prices are the equilibrium, determined by consumers willing to pay a certain price for a good or service and producers willing to accept a certain price for the same good or service through free voluntary exchange. When voluntary exchange is restrained, as in the case of monopoly franchises, prices tend to rise. Competition and consumer choice drives the producers to comply within the range of prices acceptable to the consumers. Producers do this by making improvements to their production processes, thus minimizing waste and inefficiencies, in an effort to satisfy consumer demand.
So, how does the FPUA determine its rates without voluntary exchange and competition? How do they know the market will allow prices to rise for the next five years? In other words, do they have magical powers to predict the future?
The justification of FPUA’s rates is determined by indexes provided by the Florida Municipal Electric Association. This is an index of “public utility” authorities in Florida. It appears as if the belief in illustrating FPUA’s compliance to the range of other “public utility” rates indicates their competitiveness. But, this is not competitive at all. No two of these “public utility” authorities compete to supply the same consumer’s demand. It is price fixing by territorial force in the same way that drug cartels or gangs operate. They have no magical powers. They know that prices will rise because they have the assurance from government that their consumers will be forced to conduct business with them if they have a business or live within their “territory.”
The term “public utility” is a misnomer. Twentieth century economist Murray Rothbard wrote about the idea of “public utility” in Power and Market: “The very term ‘public utility’ … is an absurd one. Every good is useful ‘to the public,’ and almost every good … may be considered ‘necessary.’ Any designation of a few industries as ‘public utilities’ is completely arbitrary and unjustified.” We have seen cable TV, Internet, and phone providers declare themselves to be a “public utility” to seek the protection from competition by government decree. In order for these “public uses” to be “necessary,” they need to satisfy the demand. And, only the individual can determine what transaction can be the most valuable for their money.
The natural monopoly theory is a myth. This theory supposes that competition cannot persist in a given industry, but the theory is refuted by the fact that competition in electric utility has persisted for many decades in dozens of US cities. Thomas DiLorenzo, Economics Professor at Loyola University and senior faculty at the Mises Institute, noted in an essay, “It is a myth that natural-monopoly theory was developed first by economists, and then used by legislators to “justify” franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention.”
DiLorenzo continued on to cite examples of competition yielding better purchasing power for the consumer than “monopoly,” such as:
- Arizona political authorities allowed Cargill, Inc. to buy power from anywhere in the West; the company expects to save $8 million per year;
- The Ormet Corporation, an aluminum smelter in West Virginia, obtained state permission to solicit competitive bids from 40 electric utilities;
- When the Tennessee Valley Authority (TVA) was faced with competition from Duke Power in 1988, it managed to hold its rates steady without an increase for the next several years;
- California is transforming its electric utility industry “from a monopoly controlled by a handful of publicly held utilities to an open market”;
- Wisconsin Public Service commissioner Scott Neitzel recently declared, “free markets are the best mechanism for delivering to the consumer … the best service at the lowest cost”;
- Alcan Aluminum Corp. in Oswego, New York has taken advantage of technological breakthroughs that allowed it to build a new power generating plant next to its mill, cutting its power costs by two-thirds. Niagara Mohawk, its previous (and higher-priced) power supplier, is suing the state to prohibit Alcan from using its own power.
In his 1986 book Direct Utility Competition: The Natural Monopoly Myth, economist Walter Primeaux, who had studied electric utility competition for more than 20 years, discovered that: 1) direct rivalry between two competing firms has existed for very long periods of time — for over 80 years in some cities, 2) the rival electric utilities compete vigorously through prices and services, 3) customers have gained substantial benefits from the competition, 4) costs are actually lower where there are two firms operating, and 5) any consumer satisfaction problems caused by dual power lines are considered by consumers to be less significant than the benefits from competition.
The question becomes, what is the goal of operating the FPUA in its current capacity?
I want to be clear here. I am not challenging the FPUA, the City, or any of the individuals. I am challenging the false logic that monopolies created by the use of force by government decree are wise, efficient, and serve the public’s best interest. In fact, a good idea never needs the force of government. In order to solve our pressing problems, we have to engage in honest dialogue. And certainly, offering the same solutions to the same problems yields more of the same problems, only compounded.
If the goal is to maintain the status quo, not rocking the boat, and/or protecting the existing revenue transfer to the City, then continue the path we’ve been heading.
If the goal is indeed to serve the best interest of the public by offering a quality good or service at an affordable price, eliminating the monopoly franchise of the FPUA and encouraging competition is the correct avenue. Lower costs of living for residents will spur more spending in the local economy; and lower operational costs for businesses will allow more investment into expansion for existing businesses while encouraging new businesses to relocate in our community.
I believe you originally ran for office to truly make a difference and serve the public’s interest. It just so happens that our society has long attempted to overturn laws of economics. We cannot overturn laws of physics because we would like to, the same is true for laws of economics.
Restoring the utility market may seem to be a difficult path. There is a maze of existing commitments and contracts standing in the way. It is important to consider why it is difficult, the continued struggle to practice this failed theory.
I ask that you support the constituents that elected you by restoring competition in the utility markets.
I thank you for your consideration of this information.