A key tenet of the “Reagan Revolution” of the 1980s in the US, and the “Thatcher revolution” of the same vintage in the UK, is the idea that there are no such things as public goods. That is, everything is done better in the private sector than by government. Therefore, the #1 role of government is to shrink itself, to stop impeding the private sector’s ability to address national economic needs. That has turned out to be super-wrong, as evidenced by the parlous state of our transport and communication networks in the US. Better still, look at the UK.
I’m mentioning this here just to get the point out of the way. While important, this political stance is, I think, only a secondary factor in the present sad state of our public utilities in general, and of our electricity generation in particular.
public utilities
The argument in favor of them is that it’s better and much cheaper to have one or two monopoly providers of water, electric power, natural gas… rather than a whole flock of sub-optimal providers digging up the streets to reach customers and charging high prices in a vain attempt to reach breakeven. Instead, have a monopoly provider, monitored and regulated by a government commission which would set the prices the operator can charge.
Whether in hindsight this is the better system is a moot point. This is what we have.
the mechanics of the system
The typical (=only, as far as I know, but I’m not an expert here) method, is to set a maximum allowable annual return on the utility’s net plant and equipment.
“Net” here is the overall outlay on plant and equipment minus accumulated depreciation.
The utility meets with the commission periodically, bringing spreadsheets that show its actual and anticipated: number of customers, usage, input prices, overhead expenses and capital spending plans. Out of all of this, it sets unit selling prices for output that, if met, will deliver the commission-determined allowable return–no more, no less.
two cases:
— (1) the service area is growing steadily, so the utility is continually signing up new customers and adding plant and equipment. To finance this expansion, the utility is regularly turning to the capital markets to sell bonds, and occasionally new equity. In order to encourage investors to buy these issues, the utility commission has got to maintain a return on assets that’s high enough to assure them that the loans are safe and that the company can maintain rising dividend payments to shareholders
— (2) the service area is mature, demand is steady, no new financing is needed. In this case, there is no longer a strong incentive for the utility commission to set a high allowable return on assets. In fact, over the short term, at least, the situation is quite the opposite.
more on Monday