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April 30, 2008

Are utilities different?

All of us are being asked to conserve resources, from water to electricity to natural gas. But now we hear something that seems both disturbing and inconsistent. Some providers of these resources say when use falls, they have to charge higher prices to stay in business. This doesn't seem fair or logical. Help us out. Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, let me see if I can help you out. What we're talking - generally here - is about utilities, providers of water, power, for example, as well as electric power and natural gas. And these utilities are different in the sense that they experience what economists call declining average costs because of their huge fixed costs related to building the generating capacity or the reservoir and the relatively small variable costs related to selling and moving that energy or water to households. This means that the more they sell, the lower their average costs. That's one reason why they are so-called natural monopolies, and they are regulated. But it also means that the less they sell, their average costs rise, and they have to charge higher prices to cover those higher costs. So what the utilities are saying is exactly right. There is an economic logic here. It does send out an unfortunate perception. But if you are going to blame someone, blame it on the huge costs that have to be incurred to build power plants and reservoirs."

Posted by Dave at April 30, 2008 08:21 AM