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March 15, 2006
Utility Regulation
The NYT reports on what some would see as a scandal.
Essentially, utilities in the US sell at regulated prices. These prices include the taxes that they should pay on their regulated profits. But, many of these companies also have subsidiaries that are not so regulated. Losses at such can be offset against the taxes collected on regulated profits.
All fine and dandy but some would see this as non-payment of taxes to the government of money collected from the consumers.
The answer is that the US has the wrong method of regulation of said utilities. Something that is in fact well known.
Something more like the UK system would help, where instead of prices being so rigidly controlled on a year by year basis, something more like the 5 year system here be used. Yes, prices (say, in water) are allowed to rise by a figure agreed with the regulator and then set for five years. Any efficiency gains made over that period go through into profits and can be distributed to shareholders.
So, even though there is regulation of prices, there is still an incentive to increase efficiency. That increase can then be applied to the benefit of the consumers at the 5 year re-negotiation, allowing the cycle to start all over again.
No, not a perfect system but better than the US one where there is little or no impetus for the utilities to become more efficient. If they do the extra profit is simply regulated away. Why bother?
March 15, 2006 in Business | Permalink
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Comments
I have not read the nyt article-stomach is not quite strong enough to acess that site-but there's evidently something in it that implies some sort of annual regulation of utilities? I got that impression from Tim's comments. The regulation of almost all "Investor Owned Utilities" and some Rural Electric (and Water) Cooperatives is at a State level. Most of the States set rates after a request from the Utility for a change. The Utilities financial performance is considered on the basis of a "test year". After revision to exclude some categories of costs, rates are then determined for the various classes of consumers by the application of cost recovery, including defined depreciation, and a "Rate-of-Return" on investment. That's simplified, somewhat-but typical. It is rare that an electric utility appears for a "rate case" more often than say, every 6-10 years in recent times. A utility can "game" the regulation by applying after a particularly poor year, receive a significant increase in rates, then by improved sales and practices, make a considerably enhances profit. As fuel costs are generally charged as incurred (increases or decreases), the utilies gnerally are able to "retain" any gains from incresed efficiency, sales increases, etc. How is the Brit system any different except for pre-scheduled reviews-which, btw, most of the U.S. states can require aat any time there might appear to be some kind of excessive windfall occuring.
Posted by: MikeinAppalachia | Mar 15, 2006 4:11:58 PM
Sorry for the numerous "typo's" in the above. Also, when rates are determined, generally, subsid's losses (and/or gains) are not included. While the various States differ-generally, pro forma taxes are included in the "test year" accounting as a cost. Utilities are corporations, so there actual payment or non-payment of taxes are based upon the tax codes as applied to corporations. The payment of taxes of all types is treated as a cost (except in Manila)and allowed for in the rate-setting. That the Utility does not actually pay such in the future isn't a function of regulation.
Posted by: MikeinAppalachia | Mar 15, 2006 4:22:45 PM
