Indiana faces a looming problem in electricity markets that many states have already tackled. It is not a specially complicated issue, but with more than the usual demagoguery surrounding it, a little explanation is in order. Electricity is sold to consumers under a form of price regulation. The reason for this is that consumers cannot change the wires to their home any time they see a lower price. So, electricity production is what economists call a “natural monopoly” and everywhere power is sold there is some form of pricing regulation.
The way this works is that the electric company builds power plants, pays workers and buys fuel. Then the regulator (usually an appointed board) sets a price for consumers that covers the cost of the fuel and the people and pays the companies a “fair” rate of return on their plant and equipment. In return, the company must provide service to everyone in their region.
This pricing regulation is not perfect. It cannot be. No price will meet the mutually exclusive goals of getting service to everyone at the lowest costs. So, regulators (or owners of rural co-ops) compromise by having some consumers subsidize others. Traditionally, it has been structured so wealthier households subsidize poorer ones, but that is changing.
A decade ago Congress passed legislation that required electric utilities to buy power from consumers (typically large farms) who installed solar and wind power on their land. As in many states, the requirement was that the power companies buy any excess power from this homemade electricity at the same price other retail customers pay for their electricity. Therein lays the problem.
The power company loses money on the deal, and growth in solar and wind power means that soon it will be big money. Many of us might be tempted to say, “Who cares?” But remember that the electrical company is regulated, so it cannot lose money overall. That means someone else is paying wealthy landowners to have wind and solar power. That someone else just might be all those customers who do not have solar cells on their roof.
It gets worse. The folks who have the solar cells and wind turbines are going to be a good bit more affluent than the typical electric utility customer. These systems are expensive. So, this pricing scheme acts much like a regressive tax that most ratepayers pay to wealthier owners of the home solar cells and wind turbines.
Now, there are solid arguments for subsidizing renewable energy, but implementing a regressive tax that hits low- and middle-income electricity customers is close to the dumbest thing I’ve ever heard of in years.
Many groups, including the National Black Caucus of State Legislators, are calling on states to change the rules. Indiana should do so. It is funny though, that Indiana’s Community Action Coalition is fighting against change even though this rule might honestly be called a CAFO subsidy. Wow. Pigs may not fly, but they have subsidized electricity.
Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.
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