*** The Official CUCKposting thread ***

[BananaStand]

The bold is something the market can sort out on its own without regulations.

So I've given this example before, but I guess I'll repeat it again. Tell me how the market would solve this problem on it's own.....

The Public Utility Oversight board doesn't oppressively regulate anything. They don't tell companies how to operate, who to hire, who to sell to, what projects to pursue, how to grow, or anything like that.

Basically, it works like this. The utility company adds up all of the capital they have invested in this system to deliver electricity. Then they say....well if I had instead put all that capital in a mutual fund...I could have made 8% with virtually no risk. But I actually sunk my investment into electricity production and delivery. That's harder, riskier, and benefits the economy more....so it's reasonable for me to expect a higher return. How about 11%?

Then the oversight board says yea or nay....end of regulation.

As you can see, the more capital the electric company invests...the more money they are allowed to make.

So, if you're a project manager at the electric company, you're given a project, and a budget. It is important to spend ALL of your budget. If you don't, then the capital investment is smaller, and the company makes less money.

So, let's say they want you to build some kind of electrical doohickey. First step in the project is to get a building permit. Then you find out....oh shit...the permit process takes 14 months. Guess what.....you aren't going to complete your project this year.

But you still have to spend your budget. So you start pulling in future projects that you can do now...just to spend money.

Maybe you replace some utility poles that aren't due to be replaced for another 5 years.

That's bad. What's basically happening is that you're charging consumers for infrastructure improvements that they don't need. What happens in that case, is that the oversight body looks at your expenditures and says "No, this investment doesn't provide any benefit to consumers, it just pads your bottom line. By royal decree...this line item is disqualified from your rate calculation"

How would the market fix that on its own?

[wufwugy]

I would like to understand the point you are making and I don't currently understand some of these premises. If you could clarify that would be great.

Basically, it works like this. The utility company adds up all of the capital they have invested in this system to deliver electricity. Then they say....well if I had instead put all that capital in a mutual fund...I could have made 8% with virtually no risk. But I actually sunk my investment into electricity production and delivery. That's harder, riskier, and benefits the economy more....so it's reasonable for me to expect a higher return. How about 11%?

Then the oversight board says yea or nay....end of regulation.

Is the company asking the oversight board if it can raise its prices enough that its return is 11% instead of 8%?

As you can see, the more capital the electric company invests...the more money they are allowed to make.

I don't understand how this follows. More capital investment doesn't mean more revenue or profit. Unless this is referring to the government regulation, in which case this is perverse incentives. But I don't want to get into that now.

So, if you're a project manager at the electric company, you're given a project, and a budget. It is important to spend ALL of your budget. If you don't, then the capital investment is smaller, and the company makes less money.

Why is it important to spend all of your budget? Why is spending more budget meaning more revenue/profit? Firms prefer to be under budget as much as possible. Why does this firm want to not do that?

So, let's say they want you to build some kind of electrical doohickey.

Who is they?

First step in the project is to get a building permit. Then you find out....oh shit...the permit process takes 14 months. Guess what.....you aren't going to complete your project this year.

Why does the permit process take 14 months?

But you still have to spend your budget. So you start pulling in future projects that you can do now...just to spend money.

Maybe you replace some utility poles that aren't due to be replaced for another 5 years.

I said I wouldn't get into this before better understanding your premise, though I will say that this sounds like the typical perverse incentive caused by government intervention.

[BananaStand]

I would like to understand the point you are making and I don't currently understand some of these premises. If you could clarify that would be great.

Ok

Is the company asking the oversight board if it can raise its prices enough that its return is 11% instead of 8%?

The %'s are irrelevant here. The company is presenting what it feels is a fair rate of return on invested capital. The oversight board represents the consumers. They are asking the company.."Why this price?" on behalf of the consumer.

Companies have to justify their prices to consumers all the time. It just happens in more subtle ways. How do I know a Honda Accord is priced fairly....because a Toyota Camry costs about the same. So unless those companies are colluding, I can trust that I'm not getting fucked over.

I don't understand how this follows. More capital investment doesn't mean more revenue or profit

If you invest $1,000 and earn a 10% return, you've made $100
If you invest $10,000 and earn a 10% return, you've made $1,000

$1000 > $100

Why is it important to spend all of your budget? Why is spending more budget meaning more revenue/profit?

Illustrated above. Though it's important to note that the spending isn't an expense the way payroll, facility rent, or insurance are....it's an investment. The money is capitalized on the company's balance sheet, not it's P&L.

Firms prefer to be under budget as much as possible. Why does this firm want to not do that?

You want to be under budget when it comes to expenses. This is not an expense, it's an investment.

Who is they?

Your bosses at the electric company.

Why does the permit process take 14 months?

Don't get hung up on this specific example. If you're running a public utility, or a train track, or the water works, you have to build a lot of different stuff in a lot of different places. There's often unforeseeable red tape that delays projects past their due date. I used permits as an example because that's what I've seen happen. But maybe you're laying underground power lines and run into a shit load of ledge in a certain area. Now instead of digging, you have to blast. Or maybe you're digging and you find native american artifacts and the whole area is shut down for 6 months so there can be archaeological explorations. Any number of crazy things can happen to delay a project.

I said I wouldn't get into this before better understanding your premise, though I will say that this sounds like the typical perverse incentive caused by government intervention.

How? It's the government intervention that negates the perverse incentive.

I'm only claiming to know all this based on one particular company that I audited as part of a forensic accounting engagement that my company had with the electric company in Vermont. They planned projects....the projects ran into problems that delayed them beyond the current fiscal year....so they spent the money on other, significantly less necessary stuff.

The oversight board called them on it, disqualified a lot of their investments from the rate calculation

Again, I think it's important here to realize that the government's role is really small. They didn't "punish" the company. Instead, they spoke for the consumers that they represent and told the company "Hey, we're not paying for this". End of oversight/regulation. The company's punishment came from the market, in the form of crippled cash flow and their bond rating going to junk status pretty much overnight.

[wufwugy]

If you invest $1,000 and earn a 10% return, you've made $100
If you invest $10,000 and earn a 10% return, you've made $1,000

$1000 > $100

The return on each dollar change is marginal. I'm not sure why the firm assessed that if it just invested more it would profit more.

I'm only claiming to know all this based on one particular company that I audited as part of a forensic accounting engagement that my company had with the electric company in Vermont. They planned projects....the projects ran into problems that delayed them beyond the current fiscal year....so they spent the money on other, significantly less necessary stuff.

Why did they do that? Did they assess they would make the same rate of return on less quality investments? Why would they make that assessment?

The oversight board called them on it, disqualified a lot of their investments from the rate calculation

If it is the case that the firm assessed returns based on expectations about what the oversight board would do (it sounds like they did, but you can correct me on that if they didn't), then that explains some important perverse incentive problems that contributed to that weird investment strategy.

[BananaStand]

The return on each dollar change is marginal. I'm not sure why the firm assessed that if it just invested more it would profit more.

Because that's how you determine a price in a situation like this. You can't just try to pinpoint what you think customers are willing to pay. That's a dangerous game when your product is inelastic.

It goes...

([total capital investment] x [fair rate of return]) + Operating Expenses = Total Revenue

Total Revenue / Kilowatt Hours produced = Price for Electricity.

Why did they do that? Did they assess they would make the same rate of return on less quality investments? Why would they make that assessment?

See the equation above. Invested capital has a rate of return. More capital invested at the same rate of return = more actual dollars

If it is the case that the firm assessed returns based on expectations about what the oversight board would do (it sounds like they did, but you can correct me on that if they didn't),

That's about right.

then that explains some important perverse incentive problems that contributed to that weird investment strategy.

What's the perverse incentive?

Are you talking about the project managers who have a mandate to spend, rather than save?

[wufwugy]

Because that's how you determine a price in a situation like this. You can't just try to pinpoint what you think customers are willing to pay. That's a dangerous game when your product is inelastic.

It goes...

([total capital investment] x [fair rate of return]) + Operating Expenses = Total Revenue

Total Revenue / Kilowatt Hours produced = Price for Electricity.


See the equation above. Invested capital has a rate of return. More capital invested at the same rate of return = more actual dollars

I'm trying to figure out why they assessed the same rate of return for investments that should be expected to have different yields. In the hypothetical you provided, it appears to me that the "electrical doohickey" and the "pulling poles out of the ground five years too early" were assessed at the same rate of return by the firm. It's quite unlikely that would be a market rate, which is exemplified in the oversight board declaring that the "benefit" of each activity is not the same.

That's about right.

What's the perverse incentive?

In this case, a perverse incentive in this case could be that the firm assessed returns based on expectations about what the oversight board would do, resulting in the firm making stupid decisions while expecting the board to sign off on them.

[BananaStand]

I'm trying to figure out why they assessed the same rate of return for investments that should be expected to have different yields. .

Why? It doesn't matter. And in real life, they probably aren't the same. The actual process of making what's called a "rate case" is alot more extensive and nuanced than I'm willing to write in a forum post. Just know that it takes many meetings, and many pages of figures. Maybe the investments have various classifications that demand different returns on invested capital. It's really not important. what's important is the concept.

The price of electricity is not a function of what people are willing to pay for it. It's impossible for the consumer to assess what is a fair price, because there is nothing to compare it to. There is a natural fear of being exploited among consumers because of this. therefore, they used the power of democracy to protect themselves by creating this oversight entity.

So then, how do you decide what to charge for electricity? Costs are easy. They're quantifiable. This pole cost X, the wire cost Y, the laborer costs Z, and that's all real money. But the electric company isn't in business just to cover costs and break even. They're investment, effort, and risk deserves a profit.

What is profit? It's a return on invested capital.

How much profit should the electric company make? Ask the market. What do other, similar, companies experience as a return on invested capital? Or what do other similar assets generally yield as a return (this is where we could see differences between telephone poles and 'doohickeys')

Then you get into the nitty gritty stuff we don't have to get into here. But maybe there's some reason this particular company should be allowed to make more or less than the industry norms. That's all stuff the oversight board would handle.

This process allows the elec company investors to earn a fair return on their money. By fair, I mean they are not motivated to invest in something else. Maybe "fair" isn't the right word. how bout 'satisfactory'. the process also ensures that consumers are not paying any more than they need to in order to provide a 'satisfactory' return to those who provide their electricity.

The government doesn't really have a ton of power here. If they try to squeeze the electric company by shaving points off of their returns, then they will motivate investors to invest somewhere else. All they are really doing is making sure that the company can't bilk consumers and score windfall profits just because they're the only game in town. That's really the whole reason I brought this up. Ong had a case of MUBS about monopolies. I thought it would help him sleep at night to know that someone out there is watching out for the consumer.

In this case, a perverse incentive in this case could be that the firm assessed returns based on expectations about what the oversight board would do, resulting in the firm making stupid decisions while expecting the board to sign off on them.

Sounds like you're giving them a little too much credit for being sinister. It's more like they knew what the oversight board would do, they just weren't competent enough to prevent it from happening. they would do their capital budget for the year, then they would communicate it to the project managers. They would tell them "our rate plan assumes that you're going to spend this entire budget. And if you succeed in hitting these numbers, we will give you a bonus"

then the project managers went about their business and inevitably some projects hit roadblocks. If you're a project manager...are you gonna eat your bonus because the board of selectmen in Cowcock Vermont only meets once every six months, and because of that you won't get your permit in time?? FUUUUUUCKK THAT! You'll just spend money on something else and get paid right??

Well, one guy got away with it. Then when his buddy ran into a similar problem, he gave his buddy a tip on how to beat the system. Pretty soon everybody was doing it, and it raised some flags with the oversight board.

It's not as though company executives were actively trying to falsify their 'rate case'. Call it incompetence. This loophole in their system resulted in them spending a lot of money on stuff consumers didn't need, and as a result consumers refused to give them a return. (sounds free-market-ish, huh?)

That's ALL the oversight board does. I don't even see how you could consider that an un-free market. I'm still hesitant to call it "regulation". All it's doing is providing some transparency to the consumer. It has no punitive powers. At least not when it comes to rate cases. Maybe it can levy fines if it finds something hooked up with too much duct tape. But that's not what we're talking about.