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 Originally Posted by wufwugy
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.
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