Daniel Englander
The Morning Feedstock: June 17, 2008 June 17, 2008 at 8:00 AM
The State of New York draws ever closer to shooting itself in the foot, as chances for success begin to run out for the planned $4.5 billion acquisition of Energy East by Spain’s Iberdrola. State judge Rafael Epstein ruled Tuesday the acquisition should be blocked because of its potential to raise electricity rates across the state, echoing an earlier administrative ruling by the New York State Public Service Commission’s board. Epstein did say he would approve the acquisition if Iberdrola capitulated on the PSC’ request to provide $650 million in ratepayer subsidies. Iberdrola has said it would be more than willing to take its business elsewhere. So why, in light of the fact that the acquisition as been greenlighted (ha!) by the other three states involved in the deal, is the PSC continuing to hold out? In May we pointed out that the intense lobbying pressure from other utilities and industrial manufacturers in the state, who submitted a lengthy intervenor’s brief to the PSC arguing on behalf of Joe Ratepayer. Problem is, most of these companies generate their own power, or have mid-term electricity contracts, so that the acquisition would do little to impact their variable cost structures.
So now you’re probably tempted to say, c’mon guys, a little competition never hurt anyone. Well, right. But maybe there’s something a little indirect going on here. The producer price index, the composite price paid for finished goods made by domestic producers, rose 1.4 percent last month and moved up 7.2 percent on the year. The increase was borne largely on the back increasing food and energy cost. We know this because the core PPI, which discounts food and energy costs, rose only 0.2 percent - actually shrinking by half the rate in the previous month. While this can mean the average selling price for domestic finished goods is declining, it could also mean the amount of domestic finished goods being sold is going down. In other words, cash outlays are shifting disproportionately to compensate for food and energy costs - or goods that require high amounts of food or energy products to manufacture. Capital efficient goods - those with lower natural margins - are getting squeezed out or offshored, while prices for capital intensive goods are moving up and up. This brings me back to the point in the first paragraph - is renewable energy bad for industrial production? Intuitively you’d think it’s not. But over the long term it reduces the number of places one could hide a margin increase not related to productivity gains or layoffs.
But back to the Spanish for a bit. Spain’s government will raise electricity rates in July by an average of 5.6 percent. The new rate structure falls above the country’s inflation rate, while also moving ahead of the Prime Minister Jose Luis Zapatero’s plan to have rate increases match the rise in consumer prices. The proposal, which is likely to receive approval from the PM’s cabinet, would result in a total increase for the year of 9.9 percent, which takes into account a 3.3 percent increase in January. So, here we have two cases of rate increases - one endorsed by a government, another blocked at the expense of a multibillion dollar acquisition and promise of future investment. The Spanish government is raising rates to promote energy efficiency and conservation. Under the proposal, the first 12.5 kWh consumed by a household would be free - this represents about 10 percent of average monthly consumption for a house in Spain. After that the rates would increase on a stepwise basis, acting essentially as a penalty against increasing consumption. But, of course, Spain’s emissions goal are binding, while New York’s are laughable.
Go back to the front page >>
