Rising Electricity Prices: No Surprise, No Problem

Published February 13, 2006

Dear Editor:

The electricity auction in New Jersey has experienced a 55 percent increase in prices. The Chicago Tribune reports such an increase in wholesale prices will result in a fairly modest 14 percent increase for residential consumers in the area served by Public Service Enterprise Group.

This hike in electricity prices suggests a similar price increase might occur in Illinois given that a similar auction is planned for 2007. While price increases for the first three years will be limited voluntarily by ComEd and its corporate parent Exelon, prices thereafter might go up.

Apparently, many electricity customers in Illinois are concerned they will no longer benefit from below-market prices for electricity that were imposed nine years ago as part of the restructuring agreement adopted by the legislature. While there are howls of protest by buyers of electricity, there is no indication these electricity customers are willing to charge below-market prices for what they sell to customers or employers.

Electricity prices in most markets are determined by the price of natural gas, since it is the marginal fuel used in generation. This is actually good news, since the extraordinarily liquid futures and options markets for natural gas offer the opportunity for consumers to hedge their electricity price risk exposure.

I expect banks and financial brokers in Illinois will begin to offer tailored hedging instruments for mid-size to large consumers of electricity. Failure by consumers to hedge ought not to trigger government bailouts. After all, we do not indemnify motorists who have accidents while driving without insurance.

Jim Johnston ([email protected]) is a senior fellow and member of the board of directors of The Heartland Institute.