Gov. urges end to energy windfall profits

On Friday, the Governor argued that flaws in the regulation of the energy market have led to inappropriate windfall profits for many energy producers, at the expense of bill-paying consumers. He urged the F Federal Energy Regulatory Commission to re-examine how it regulates the energy market in order to eliminate these types of windfall profits and to protect consumers.

“FERC’s current structure for regulating the energy market has enabled some energy producers to reap windfall profits at the expense of consumers across the country,” Governor Carcieri said in publicly releasing his comments to the FERC. “While the recent hurricanes have obviously impacted supplies of natural gas and oil, there is no good reason for consumers to also pay premium prices for energy produced at nuclear or coal-fired power plants. FERC’s regulatory scheme is enabling these industries to charge the same prices, even though their production capacity hasn’t been impacted in the slightest.”

The Governor noted that two mechanisms for determining the price of energy are primarily responsible for this phenomenon. First, the market price for energy is determined by the highest cost charged by any single producer, forcing local energy distributors, and thus consumers, to pay inflated energy prices.

For instance, if the cost of producing energy from oil and natural gas goes up, but the cost of producing energy at a nuclear plant remains static, the nuclear producer increases its rates to match the price being charged by the oil and natural gas producers. In this scenario, the nuclear producers are enabled to charge higher rates even though their actual production costs have not increased. This mechanism results in windfall profits for the energy producer with the lowest production cost; in this case, the nuclear power producer.

Second, the current contracting mechanisms by which energy distributors purchase power from energy suppliers also increases the suppliers’ opportunity to collect unwarranted profits in the event of supply disruptions. In Rhode Island, contracts between energy suppliers and local energy distributors often include fuel cost escalators that are tied to the price of natural gas and oil. This is despite the fact that roughly half of Rhode Island’s energy comes from sources other than oil or natural gas. When the prices for those two energy sources increase, the provisions of the contracts cause the prices of all energy being purchased by Rhode Island distributors to increase, whether or not the energy being purchased was produced by oil or natural gas. Those increased prices are passed through to consumers.

Since distribution companies simply pass these increased costs through to the consumers, they have no incentive to negotiate a better deal that more accurately reflects the true market price. The result is that these contracts, with the fuel cost escalators tied to the price of natural gas and oil, ensure that Rhode Islanders are often not paying the actual market price for the energy being purchased on their behalf by energy distribution companies.

In September, Governor Carcieri wrote to President Bush and Congress to ask them to approve $1.276 billion in emergency funding for the federal Low Income Home Energy Assistance Program (LIHEAP). The Governor also asked Congress to increase regular funding for LIHEAP in the spending bills for the new fiscal year.

Governor Carcieri has also worked to slow the rate of growth in energy prices in Rhode Island. On September 23rd, Governor Carcieri personally appeared at a hearing of the Public Utilities Commission (PUC) to testify against a Narragansett Electric request to increase electricity rates by 24 percent. The Governor argued that the PUC should delay consideration of a rate increase until it can be determined if and when the affects of Hurricane Katrina on the energy supply market would subside.

On October 4th, Governor Carcieri proposed the creation of a special emergency assistance fund to supplement the federal LIHEAP program, and to help the most vulnerable, low-income Rhode Islanders pay their heating bills this winter. Under the Governor’s plan, the emergency assistance program would be funded with surplus revenue from the gross earnings tax on electricity and natural gas. This fund would be primarily designed to enable low-income elderly and disabled residents to obtain additional home heating assistance once their federal LIHEAP grant is expended.