Andrew C. Spiropoulos
It is annoying to suffer poor service and then have the business stick you with the bill. That’s a sensible reaction to the news that OG&E is asking the Oklahoma Corporation Commission to approve a settlement agreement that will require ratepayers to cover $760 million in costs attributable to last February’s severe winter weather. The utility was forced to expend massive resources to purchase historically expensive natural gas needed to serve its customers.
There are numerous plausible objections to making consumers pay up for what happened last February. Both OG&E and the operators of our regional grid made poor decisions about the mix of fuel sources that rendered us vulnerable to extreme weather events — critics warned of these dangers well before the storm. It is also possible that suppliers engaged in legally actionable price gouging, which is always a worry in times of crisis. Surely, these matters should be investigated further.
Unfortunately, given the legal and policy principles that govern heavily regulated companies like OG&E, it is highly unlikely that consumers will be able to escape covering the costs. Public utilities are not like other companies. On the one hand, they have the benefit of a guaranteed market — everyone needs power, and you have to go to them to get it. But, on the other hand, they can’t set their prices like other businesses. The government tells them how much they can charge, with the goal of supplying services to consumers at the lowest possible price, while allowing the company to make sufficient profit so they can attract the necessary capital from investors to run the enterprise.
The prices utilities charge customers are carefully calibrated both to cover the company’s costs and to allow a reasonable profit, generating the necessary return on investment. So when the storm hit, and OG&E had to lay out hundreds of millions of dollars to generate its services — for which, at the time, consumers paid the regular price —the balance between cost and profit was thrown off. Unlike less regulated companies, who can just charge what they want and generate huge amounts of revenue during a crash in supply, allowing them to cover their increased costs out of the stream of revenue, OG&E was required to maintain its prices, causing enormous losses that would sink companies in the regular economy.
The only way for utilities to recoup these expenses and stay in business is do precisely what regular companies would have done during the emergency — pass their costs on to consumers. The only difference is that OG&E and other public utilities have to do it after the fact — and under the scrutiny of the government regulator. The Commission is tasked to make sure OG&E is made whole, but does not take advantage of the crisis to amass more revenue than necessary to maintain the proper balance of consumer price and rate of return. It also would be useful if the Commission would use this opportunity to strongly criticize OG&E for its past poor judgment and demand plans for reform.
The peculiarity of this situation is that, because the costs were so astronomical, consumers cannot be realistically expected to pay them immediately. Wisely, last session, the Legislature devised a plan to finance this reimbursement over 28 years, so consumers will only see a small increase in their bills. This solution isn’t perfect, but it will do.
Andrew Spiropoulos is the Robert S. Kerr, Sr. Professor of Constitutional Law at Oklahoma City University and the Milton Friedman Distinguished Fellow at the Oklahoma Council of Public Affairs. The views expressed in this column are those of the author and should not be attributed to either institution.
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