ECONOMICS 1a

ECONOMICS 1a: Should
we cap food prices too?

Understanding that speculators
do good is key to cap evils

Sonny Popowsky, the nationally respected consumer advocate for Pennsylvania ratepayers, is passionate about keeping curbs on retail prices "through the [permanent?] transition" to competitive markets in the Keystone State.
     He fears market prices will spike and hurt the common customer. He doesn't want to hear about price signals.
     He's not a dope.
     Popowsky graduated cum laude from Yale University and has a law degree from the University of Pennsylvania.
     Popowsky simply has a different view of economics.
     Electric power is an essential and must be controlled, he said, in Hershey.
     But food is an essential too, we noted. Should we control food prices?
     Yes, he replied, if there were only one supplier as in electricity, he replied.
     That's funny. Pennsylvania has several suppliers.
     William Hecht, PPL CEO, addressed the fears of price spikes and how the market reacts. He was the keynote speaker in January.
     We had asked him whether the people of Pennsylvania will awaken to the damage the price caps have on the market.
     Yes, he replied, "the people will and will come up with a replacement for price caps."
     What's wrong with volatility in electricity prices, he asked.
     If the end user sees volatility that would need to be avoided, Hecht said.
     One protection is long-term contracts at a fixed price so the consumer doesn't see spikes.
     One reason to want volatility, Hecht added, is to attract commodity speculators. "They're attracted to volatility."
     For speculators, volatility is an opportunity to earn a margin and get paid for the risk they take, said Hecht.
     Insurance companies take away volatility by selling casualty insurance, he explained.
     Insurers can take risk because they're exposed in many markets.
     "When will price caps go away?" he asked.
     As people get more accustomed to the error of comparing electricity markets with the old, regulated markets, Hecht said.
     They instead should be compared with all the other commodity markets.
     Hecht found it odd, even amazing that electric power markets are the only ones in the US where the prices are not set by supply and demand. (Story originally published in Restructuring Today 1/20/04)