Private (non) investment in monopoly infrastructure

A few news items over the last week conspired to inspire me to vent.

First of all, PG&E has been fined for it’s San Bruno pipeline explosion, and they just had another one near Fresno (however, that one may, or may not be a main­te­nance fault). An in­ter­est­ing side–note is that PG&E was granted a rate hike last year by the California Public Utilities Commission to cover their costs in improving in­fra­struc­ture safety.

The other was an article in the Wall Street Journal this last week stating that a number of nuclear power station operators in the US are looking to charge their customers, through rate hikes, for either lifetime extension programs or de­com­mis­sion­ing costs.

In both these cases, the supplier is a regulated, formal or de facto monopoly. Also, they are generally private cor­po­ra­tions that are beholden to share­hold­er/owners, many of which are very limited in their ownership goals (read, short to mid term share price growth).

Another thing that is common, that in both cases, these are long–lived pieces of in­fra­struc­ture, both pipelines and nuclear power stations have lifetimes measured in decades. It is also generally understood that long–lived in­fra­struc­ture needs continue main­te­nance work, and that, at some point, it will need to be replaced and de­com­mis­sioned. These costs should not come as a surprise to an entity that builds and operates such in­fra­struc­ture, nor should it come as a surprise to the regulators that supervise them.

In fact, they have, and do, recognize that. In all these cases, the operator has justified part of their rate requests to their regulators as the necessary costs of main­tain­ing that in­fra­struc­ture. In short, the rate payers have been paying for that main­te­nance and eventual re­place­ment or de­com­mis­sion­ing from the start, it’s built into the rate. In fact, in the case of PG&E, it’s covered in the gas trans­mis­sion rate.

So, if we’ve paid for it, why are we being asked to pay for it again? In the case of PG&E, the main­te­nance we’ve already paid for was obviously (and tragically) not sufficient, or the monies that were paid were re–directed elsewhere. In the case of future costs to extend or replace the nuclear plants, we’re being asked to pay again because, hopefully, the operator has discovered that what we’ve paid wasn’t enough. If that is the case, why? Were they just bad in their budgeting, or again, did the monies go to something else?

Most companies would not have the cojones to ask for a customer to pay a second time for the company’s mis–management. When Ford had the exploding Pinto problem, they didn’t ask their customers to pay more for the cars going forward to cover the cost of necessary re–en­gi­neer­ing. Why, because the customers would, rightfully, take their business elsewhere. So, why do these regulated industries think they can ask their customers to fund the company’s mis­man­age­ment? One word — monopoly. The customer can’t take their business elsewhere, they are captive.

The reason for this disparate behavior is simple. In a non–monopoly company the loss of a customer is a direct hit to the bottom line. It is much more expensive to acquire a new customer than to keep an existing one. If a company shed lots of customers because they asked those same customers to fund the management’s failure, the share­hold­ers would be the one that suffered and would probably loose more money than what they would loose if the company paid to fix their ia­tron­genic problem.

On the other hand, since the customers of the monopoly company are captive, they can’t be “lost.” Therefore, the costs to the share­hold­ers of asking those customers to fund the mis­man­age­ment, there is no cost, whereas the company just “manning up” and paying to fix its problem would have an impact to the bottom line, and therefore the share­hold­ers. Actually, the situation is worse. Because there are no (or little) con­se­quences to the company (and therefore the share­hold­ers) for the mis­man­age­ment, there is even an incentive to mismanage that long–term main­te­nance investment, not grossly, but things like delayed main­te­nance or value en­gi­neer­ing become, po­ten­tial­ly, more prevalent.

So, how do we fix this? It’s not easy, or we already would have done so. But, in short, we should enforce rules for regulated monopolies that basically state that they carry the something ap­prox­i­mat­ing unlimited liability for a service if they use that service as a jus­ti­fi­ca­tion for a rate model. If it then becomes obvious that they are not, or have not, performed, the company should remedy the situation without recourse to the rate payers. If they are found to be in­com­pe­tent in doing so, then the regulator should find a provider who can rectify the deficiency(s) with the cost being born by the company that collected the revenues to provide that service.

This would more closely align the share­hold­er with the customer, and enforce the drive for competent management of these critical and capital intensive in­fra­struc­tures. Remember, this is really only relevant for monopoly services. if the customer can re­al­is­ti­cal­ly obtain the service from other providers, then this may not be necessary, as commercial pressure should force the company to perform.

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