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An ode to the customer, the measure of all things.
Fortnightly Magazine - March 15 2001

on down. State officials even had the gall to ask for refunds of charges made in excess of "just and reasonable" levels. Coming as a surprise to no one but the economists, the California ratepayers apparently did not think of the rate spikes as "fair" or "just and reasonable."

Why Cost Counts

We have heard ad nauseum that a price set in a competitive market is efficient—that such a price will bring supply and demand into balance. But is such a price "fair?" Is not a cost-based regulated price fairer and more "just and reasonable?" I guess that we moderns have been conditioned to trust implicitly in markets—that "competitive" prices make for both efficiency and justice. Certainly that is the thesis for the antitrust laws. Those laws are concerned with the workings of the market process. A price emerging from a properly competitive market is deemed efficient and fair in the eyes of the law. So it is intriguing that ratepayers are hesitant to accept this gospel. The reasons, however, are not difficult to guess.

First, ratepayers are understandably loath to think of the price of electricity in market terms. That the prices of electricity futures have begun to appear in the financial section of the newspapers is no big deal for ratepayers. If pressed, ratepayers would probably tell you that rates ought to track costs—provided that the costs aren't phony. That is the way regulated prices are arrived at. But, of course, market prices also are supposed to approximate cost in the long run. Unfortunately, ratepayers don't know if they'll be around for the long run.

A second and related reason also underlies consumer misgivings over the preaching of economists. Consumers are skeptical-and justifiably so—that markets, particularly electricity markets, can be made free of manipulation. With economists looking under the bed for "market power," this attitude of consumers is understandable. Perhaps ratepayers are just dunderheads. All the same, it will prove very difficult to persuade them that price spikes caused by shortages are the proper product of a competitive market. Moreover, quite aside from the question of market manipulation, consumers simply are not prepared to concede that there is anything "fair" about prices that far exceed cost, even if they merely reflect a demand out of sync with supply. If that condition persists, consumers will suppose that it isn't by accident.

Is it any wonder that ratepayers feel quite stranded? With apologies to Shakespeare, is it time to kill all the economists?

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