The ability of many small businesses to survive today's troubled economy is seriously hampered by pervasive inequities in electric power rates. Small business is paying too much compared with major industrial consumers.
As of March 1982, small business was spending 6.79 cents per kilowatt hour, compared with 4.83 cents spent by large industrial users. Small business consumes about 23% of the total electric power purchased in the United States, but it contributes 27% of utility company revenues. Big industry, on the other hand, consumes 40% of the power but contributes only 30% of utility revenues. The inequities help electric company balance sheets, subsidize major industry, and drain resources from small business.
For most small companies, electricity is the primary energy source. This is especially true in retailing, which constitutes a large part of the small business sector. Alternatives are limited. The entrepreneur, often facing a capital crunch, finds it particularly hard today to raise investment funds for electricity conservation measures or for such innovative energy options as burning waste material or using solar energy.
For more than half a century, major industrial companies have saved money on electricity through declining block rates. These are price schedules that charge less per unit as the customer buys more. Utilities justified this practice on the basis that it was cheaper to provide one customer with 500,000-kilowatt service than to supply 1,000 customers with 500-kilowatt service. Early in the century, that argument was sound. The low voltages used then meant that power could not be transmitted long distances. Electric plants were built near major industrial users; supplying smaller customers was costly. But the world of electric generation, transmission, and consumption has changed. A national network of high-voltage lines is in place. Except in the Pacific Northwest, where cheap hydroelectric power is conveniently sold in large blocks, economies of scale in supplying electricity have diminished.
Under Carter, Congress adopted the Public Utility Regulatory Policies Act of 1978, which expressed the prevailing political view that every energy consumer should pay a fair share of the actual cost of energy -- that no segment of the market should subsidize another. The act contains some measures calling for elimination of declining block rates. But the law also affords ways to avoid strict compliance; thus, utilities are retaining their declining-rate schedules.
Other proposals under the public utilities act include the use of time-of-day, seasonal, and interruptible electricity rates. These are rates that reflect the cost of providing generating capacity for peak demand. By charging higher rates at certain periods, utilities discourage peak-period consumption, eliminating the use of inefficient peaking plants, which are usually fueled by expensive oil or natural gas.
Although such rates are in accord with the principle of equity in pricing, they probably are not much help to small business. Large industrial users are more likely than small customers to be able to switch to such other fuels as coal, wood, or waste products, in response to these rates. Residential customers also tend to be more flexible in response to rate incentives. Small businesses, however -- especially those, such as retail operations, that are tied to traditional work hours -- have fewer options in energy consumption.
Who is to blame for the disproportionately high rates small businesses pay? In part, the small business community itself. Independent business owners have failed to recognize a basic principle: Electric power charges are established primarily on political grounds, later bolstered with economic justification. Public utility commissions or federal policymakers regulate power companies. Although these regulators frequently talk about free market forces, political pressures usually prevail over economic reasoning when tariffs are actually set.
Major industry, of which electric utilities are an integral part, has long understood the political process. It has protected its special interests by convincing others that what is good for big business is good for everyone. And in recent years, consumer advocates have amply represented the interests of residential customers in electric rate-making processes.
These groups have buttressed their positions with arguments from throngs of research institutes, data analysts, and economists. They are familiar with political fighting; they have lobbyists and associations to promote their views before every rate-making body.
Small business has been outclassed. Its lobbying efforts have fallen short. National small business organizations have been ineffective in dealing with energy issues. There is no small business equivalent of the Business Roundtable or the Electricity Consumers Resource Council, two Washington groups that vigorously seek electric rates favoring big business.
What should be done? Small business must attack the problem at the state and regional level, where most electric rates are set. Small business groups should participate in every electric rate hearing. If suitable small business representation does not already exist, small business-people should establish it. Also, small business groups must start to employ their own hired-gun economists to attack rate discrimination. They must not continue to accept the economic premises propagated by big business. If small business continues to pay too much, it will have nobody to blame but itself.