Risk. The word has many meanings in the utility industry, but it all boils down to undertaking risk in order to provide a dividend for shareholders. Sometimes the riskiest exploits produce the biggest return. An investor owned utility's loyalty to the shareholders who continue to fund management's lavish lifestyle overrules any loyalty to the customers being provided a necessary service at a reasonable price.
The competition for investor dollars fuels a ratcheting up of risk in order to provide bigger and bigger returns.
Where does it all end?
From a regulatory perspective, risk means not being permitted to undertake certain actions that will increase income of the regulated company. The purpose of regulation is to police the actions of private entities operating in a monopoly construct to ensure that customers are provided fair service at a reasonable cost. Regulators are the final decision-makers on utility proposals, and also serve as creator and enforcer of the rules regulated utilities must follow. Regulators are supposed to be protecting consumers, while also allowing the utility to make a reasonable profit in order to continue to operate the system.
Everything an investor owned utility does in a regulated environment is viewed through the lens of financial risk.
Should the company file a rate case? What's the risk that the return will be lowered? What's the risk that some costs may be disallowed?
Should the company sell assets to itself? What's the risk that the price will be adjusted downward? What's the risk that the transaction will not be approved?
Should the company break the rules? What's the risk that the company will be caught? If caught, what's the risk that the company will have to pay out more than it made while breaking the rules?
Regulatory risk really isn't risky at all.
Investor owned utilities make huge investments in buying the favor of their regulators. It's just one great, big utility club, where the regulators and the regulated interact daily, convincing each other that their actions benefit consumers. Consumers are not allowed to join. Regulators and regulated will find themselves together again and again, therefore they develop a cozy working relationship.
But it's an unbalanced relationship. While the regulator may think they're all sitting at the same table, they're not. The investor owned utility has nothing to lose. And the regulator's gun is loaded with blanks. An investor owned utility has access to a bottomless pool of consumer funding to appeal any regulatory decision it doesn't like, endlessly. Regulators have access to a very limited supply of money for such things, therefore, a utility can simply outspend them until the desired result is achieved. In many instances, it's not even worth trying enforce the rules for the regulator, and they may cave in before it even gets to this point.
This is a settlement. Ideally, in settlement, each party gives up something in order to create a balanced outcome. However, an investor owned utility will never enter a settlement with an equal number of eggs in its trading basket. Its rate case or asset transfer is thickly padded with things to give away that the utility doesn't really care about. The regulator's basket has less eggs at the beginning, therefore, each egg that's given away by a regulator means someone goes hungry. The regulator comes out with one egg, and the utility comes out with a dozen. This isn't a fair or balanced outcome.
And it's even more skewed when a utility gets caught breaking the rules. Rules are meant to be followed, not partially followed, or mostly followed, but completely followed. There should be simply no eggs in the regulator's basket to give away. It's impossible to break half a rule. When a utility breaks the rules for profit and gets caught, it's egg basket is full. A utility can give away some of the profits it made breaking the rule, while the regulator can only give away the rule and violate the trust of consumers, who expect that regulators enforce rules.
When a regulator begins negotiating a settlement in a rule breaking case, they are giving away the ability to break the rules without consequence.
How do you think the investor owned utility views this?
1. Chances are we won't get caught and we'll get to keep all the profits we made breaking the rule!
2. Even if we do get caught, we'll only have to give back part of the profits we made breaking the rule!
3. For every illegal action regulators catch, there are hundreds more where we'll never get caught!
4. Following the rule - zero profit. Breaking the rule - priceless!
Breaking the rules is very profitable for investor owned utilities, therefore they will keep doing so until the cost of punishment is higher than the retained profit of breaking the rules. Breaking the rules is low to no risk.
Filing a rate case, or proposing a ridiculous, overpriced sale of assets to itself, is also low risk these days. Lazy, captured regulators and ineffectual consumer advocates, who are more interested in maintaining relationships with utilities and their lawyers than with the consumers they are supposed to represent, are failing you.
Those who stand for nothing, will fall for anything.
Enough is enough.
The competition for investor dollars fuels a ratcheting up of risk in order to provide bigger and bigger returns.
Where does it all end?
From a regulatory perspective, risk means not being permitted to undertake certain actions that will increase income of the regulated company. The purpose of regulation is to police the actions of private entities operating in a monopoly construct to ensure that customers are provided fair service at a reasonable cost. Regulators are the final decision-makers on utility proposals, and also serve as creator and enforcer of the rules regulated utilities must follow. Regulators are supposed to be protecting consumers, while also allowing the utility to make a reasonable profit in order to continue to operate the system.
Everything an investor owned utility does in a regulated environment is viewed through the lens of financial risk.
Should the company file a rate case? What's the risk that the return will be lowered? What's the risk that some costs may be disallowed?
Should the company sell assets to itself? What's the risk that the price will be adjusted downward? What's the risk that the transaction will not be approved?
Should the company break the rules? What's the risk that the company will be caught? If caught, what's the risk that the company will have to pay out more than it made while breaking the rules?
Regulatory risk really isn't risky at all.
Investor owned utilities make huge investments in buying the favor of their regulators. It's just one great, big utility club, where the regulators and the regulated interact daily, convincing each other that their actions benefit consumers. Consumers are not allowed to join. Regulators and regulated will find themselves together again and again, therefore they develop a cozy working relationship.
But it's an unbalanced relationship. While the regulator may think they're all sitting at the same table, they're not. The investor owned utility has nothing to lose. And the regulator's gun is loaded with blanks. An investor owned utility has access to a bottomless pool of consumer funding to appeal any regulatory decision it doesn't like, endlessly. Regulators have access to a very limited supply of money for such things, therefore, a utility can simply outspend them until the desired result is achieved. In many instances, it's not even worth trying enforce the rules for the regulator, and they may cave in before it even gets to this point.
This is a settlement. Ideally, in settlement, each party gives up something in order to create a balanced outcome. However, an investor owned utility will never enter a settlement with an equal number of eggs in its trading basket. Its rate case or asset transfer is thickly padded with things to give away that the utility doesn't really care about. The regulator's basket has less eggs at the beginning, therefore, each egg that's given away by a regulator means someone goes hungry. The regulator comes out with one egg, and the utility comes out with a dozen. This isn't a fair or balanced outcome.
And it's even more skewed when a utility gets caught breaking the rules. Rules are meant to be followed, not partially followed, or mostly followed, but completely followed. There should be simply no eggs in the regulator's basket to give away. It's impossible to break half a rule. When a utility breaks the rules for profit and gets caught, it's egg basket is full. A utility can give away some of the profits it made breaking the rule, while the regulator can only give away the rule and violate the trust of consumers, who expect that regulators enforce rules.
When a regulator begins negotiating a settlement in a rule breaking case, they are giving away the ability to break the rules without consequence.
How do you think the investor owned utility views this?
1. Chances are we won't get caught and we'll get to keep all the profits we made breaking the rule!
2. Even if we do get caught, we'll only have to give back part of the profits we made breaking the rule!
3. For every illegal action regulators catch, there are hundreds more where we'll never get caught!
4. Following the rule - zero profit. Breaking the rule - priceless!
Breaking the rules is very profitable for investor owned utilities, therefore they will keep doing so until the cost of punishment is higher than the retained profit of breaking the rules. Breaking the rules is low to no risk.
Filing a rate case, or proposing a ridiculous, overpriced sale of assets to itself, is also low risk these days. Lazy, captured regulators and ineffectual consumer advocates, who are more interested in maintaining relationships with utilities and their lawyers than with the consumers they are supposed to represent, are failing you.
Those who stand for nothing, will fall for anything.
Enough is enough.
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