"Socialized Cost, Privatized Gain," read one of StopPATH WV's PATH protest signs that took up real estate in my garage for several years until we burned them all in a symbolic bonfire during our PATH Funeral Victory Party this past May.
This phrase succinctly describes the business model of high voltage transmission line developers. Electric consumers finance these projects through their electric bills, but receive none of the tremendous profits that transmission owners rake in with these projects. Transmission lines are owned by corporations that intend to make a profit on their product, electric transmission, so let's compare the electric transmission industry's business model to the business model of other corporations who sell products for profit.
We'll use a hypothetical example of a fictional company to flesh out a typical business plan. The Widget Company makes and sells widgets. They sell their product for more than it costs them to make it, therefore, they make a profit. The amount of profit is called their profit margin. Some companies rely on a small margin on a large number of product sales, while others make a large margin on a smaller number of sales. However, this particular aspect of profit margins will end up being irrelevant in this example.
The Widget Company needs to determine how much to charge customers for their new SuperWidget. They must take into account the parts used to build it, the cost of obtaining the parts (shipping, purchasing, accounting functions, storage and handling of parts, the cost of the manufacturing facilities and equipment), the cost of labor necessary to produce the SuperWidget (including all costs related to employees, such as insurance and other benefits, and the labor of the human resources department to administrate it) and the cost of storing, selling, shipping and billing for their finished product. But wait, that's not all. The Widget Company still needs to pay a salary to its CEO, rent an office, and make sure there's plenty of fresh coffee for the employees when they arrive to make SuperWidgets every morning. Every penny that The Widget Company spends on anything must be accounted for and an appropriate share of those costs assigned to the cost of producing the SuperWidget. Every penny that a corporation spends has to be accounted for and applied to the cost of the products they sell so they can pay their expenses and develop a profit margin that will allow them to make an overall profit.
Now let's suppose the CEO of The Widget Company gives himself a million dollar raise, replaces the coffee with Dom Perignon, and sends all the employees on all-expense-paid vacations to the French Riviera every summer. He's got to cover the costs of these purchases, so he will have to raise the price of the SuperWidget, and other products, or reduce the profit margin. If the new price of the SuperWidget ends up being higher than the price of a competitor's MegaWidget because of excess corporate spending, he will not sell enough SuperWidgets to make a profit and the The Widget Company will collapse. This is why a corporation pays attention to how much they spend, because it all ends up in the price of their product.
Guess what? You now have a working knowledge of the sub-set of accounting known as Cost Accounting -- these are the guys who figure out prices and profit margins based on company expenses. If I'd told you this post was about cost accounting, you wouldn't have read past the first sentence, would you? But now that I've tricked you into reading this far, please keep reading to find out what's different about the electric transmission industry's business model.
The cost of building a high voltage transmission line is shifted to electric consumers through federal and state ratemaking processes. It exists to provide you with a service, transportation of electricity to your home or business. When a new transmission line is needed, the transmission owner raises enough capital to cover the cost of building the line (or uses their own capital, but often it's a combination of both). This capital pays for the physical components of the new line, the purchase of necessary land and rights-of-way, the design and engineering, the cost of necessary capital, and the cost of the regulatory process to gain approval to build. This capital will be tied up for at least 70 years because electric ratepayers will reimburse the transmission owner for their invested capital little by little, over the useful life of the transmission line. Therefore, the Transmission Owner is guaranteed a certain profit margin to make it worth their while to tie up their capital in a transmission project. The Transmission Owner is also reimbursed for other non-capital expenses as they are incurred, such as the cost of marketing, the cost of employees whose time is spent on the project, and other non-capital items and expenses necessary to complete the project.
Now that you're an official cost accountant for a day, you'll be appalled that the Transmission Owner isn't held to the same standards as The Widget Company when it comes to cost accounting. It doesn't matter how much the Transmission Owner spends because it never affects their profit margin! Since they aren't selling a product when they're building a new transmission line, it doesn't matter how much it costs to produce one. They can give their CEO a million dollar raise, serve Dom Perignon in the lunchroom and send their employees on expensive vacations because the ratepayers are picking up the tab and none of those type of expenses are considered "capital" and therefore won't affect budget for the estimated cost of the project (in PATH's case $2.1B). These expenses are a free-for-all!
The Transmission Owner will make their profit by selling transmission service. Here's where they are finally subject to an actual profit margin like a normal corporation. However, the cost of producing their product, the transmission line, is free. It would compare to The Widget Company obtaining SuperWidgets free from The Sucker Corporation and then selling them for a profit. Since The Widget Company paid zero for the SuperWidgets, whatever profit they make comes in at 100%, so they have plenty of latitude for Dom Perignon and gold-plated urinals in the Men's Room, and can still make a killer profit. Of course, The Sucker Corporation has already gone completely bankrupt by then.
A real corporation utilizing the transmission industry's business model would not only go broke, they would find themselves in debt for years because maintaining a decent profit margin does not serve as an important safeguard to control outrageous corporate spending in this business model. Corporate spending that ends up in the construction cost of a transmission project has no limit, it's a blank check signed by ratepayers. And as we have found out, there's no one paying the least bit of attention to Transmission Owner spending.
Socialized Cost - Privatized Gain. Now you know how the electric transmission industry's business model could drive a cost accountant crazy. It's actually more outrageous than you ever imagined!
This phrase succinctly describes the business model of high voltage transmission line developers. Electric consumers finance these projects through their electric bills, but receive none of the tremendous profits that transmission owners rake in with these projects. Transmission lines are owned by corporations that intend to make a profit on their product, electric transmission, so let's compare the electric transmission industry's business model to the business model of other corporations who sell products for profit.
We'll use a hypothetical example of a fictional company to flesh out a typical business plan. The Widget Company makes and sells widgets. They sell their product for more than it costs them to make it, therefore, they make a profit. The amount of profit is called their profit margin. Some companies rely on a small margin on a large number of product sales, while others make a large margin on a smaller number of sales. However, this particular aspect of profit margins will end up being irrelevant in this example.
The Widget Company needs to determine how much to charge customers for their new SuperWidget. They must take into account the parts used to build it, the cost of obtaining the parts (shipping, purchasing, accounting functions, storage and handling of parts, the cost of the manufacturing facilities and equipment), the cost of labor necessary to produce the SuperWidget (including all costs related to employees, such as insurance and other benefits, and the labor of the human resources department to administrate it) and the cost of storing, selling, shipping and billing for their finished product. But wait, that's not all. The Widget Company still needs to pay a salary to its CEO, rent an office, and make sure there's plenty of fresh coffee for the employees when they arrive to make SuperWidgets every morning. Every penny that The Widget Company spends on anything must be accounted for and an appropriate share of those costs assigned to the cost of producing the SuperWidget. Every penny that a corporation spends has to be accounted for and applied to the cost of the products they sell so they can pay their expenses and develop a profit margin that will allow them to make an overall profit.
Now let's suppose the CEO of The Widget Company gives himself a million dollar raise, replaces the coffee with Dom Perignon, and sends all the employees on all-expense-paid vacations to the French Riviera every summer. He's got to cover the costs of these purchases, so he will have to raise the price of the SuperWidget, and other products, or reduce the profit margin. If the new price of the SuperWidget ends up being higher than the price of a competitor's MegaWidget because of excess corporate spending, he will not sell enough SuperWidgets to make a profit and the The Widget Company will collapse. This is why a corporation pays attention to how much they spend, because it all ends up in the price of their product.
Guess what? You now have a working knowledge of the sub-set of accounting known as Cost Accounting -- these are the guys who figure out prices and profit margins based on company expenses. If I'd told you this post was about cost accounting, you wouldn't have read past the first sentence, would you? But now that I've tricked you into reading this far, please keep reading to find out what's different about the electric transmission industry's business model.
The cost of building a high voltage transmission line is shifted to electric consumers through federal and state ratemaking processes. It exists to provide you with a service, transportation of electricity to your home or business. When a new transmission line is needed, the transmission owner raises enough capital to cover the cost of building the line (or uses their own capital, but often it's a combination of both). This capital pays for the physical components of the new line, the purchase of necessary land and rights-of-way, the design and engineering, the cost of necessary capital, and the cost of the regulatory process to gain approval to build. This capital will be tied up for at least 70 years because electric ratepayers will reimburse the transmission owner for their invested capital little by little, over the useful life of the transmission line. Therefore, the Transmission Owner is guaranteed a certain profit margin to make it worth their while to tie up their capital in a transmission project. The Transmission Owner is also reimbursed for other non-capital expenses as they are incurred, such as the cost of marketing, the cost of employees whose time is spent on the project, and other non-capital items and expenses necessary to complete the project.
Now that you're an official cost accountant for a day, you'll be appalled that the Transmission Owner isn't held to the same standards as The Widget Company when it comes to cost accounting. It doesn't matter how much the Transmission Owner spends because it never affects their profit margin! Since they aren't selling a product when they're building a new transmission line, it doesn't matter how much it costs to produce one. They can give their CEO a million dollar raise, serve Dom Perignon in the lunchroom and send their employees on expensive vacations because the ratepayers are picking up the tab and none of those type of expenses are considered "capital" and therefore won't affect budget for the estimated cost of the project (in PATH's case $2.1B). These expenses are a free-for-all!
The Transmission Owner will make their profit by selling transmission service. Here's where they are finally subject to an actual profit margin like a normal corporation. However, the cost of producing their product, the transmission line, is free. It would compare to The Widget Company obtaining SuperWidgets free from The Sucker Corporation and then selling them for a profit. Since The Widget Company paid zero for the SuperWidgets, whatever profit they make comes in at 100%, so they have plenty of latitude for Dom Perignon and gold-plated urinals in the Men's Room, and can still make a killer profit. Of course, The Sucker Corporation has already gone completely bankrupt by then.
A real corporation utilizing the transmission industry's business model would not only go broke, they would find themselves in debt for years because maintaining a decent profit margin does not serve as an important safeguard to control outrageous corporate spending in this business model. Corporate spending that ends up in the construction cost of a transmission project has no limit, it's a blank check signed by ratepayers. And as we have found out, there's no one paying the least bit of attention to Transmission Owner spending.
Socialized Cost - Privatized Gain. Now you know how the electric transmission industry's business model could drive a cost accountant crazy. It's actually more outrageous than you ever imagined!
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