A cafeteria contractor services a government building. Food poisoning kills eight people and hospitalizes dozens. Official investigations find food safety lapses. When fines are proposed, the contractor complains of the financial effects. Nobody takes him seriously. He's fined fully, his franchise is terminated. A new contractor is selected competitively.
Pacific Gas & Electric's pipeline explodes in San Bruno. Eight people perish, dozens are hospitalized. Official investigations uncover inspection procedure lapses. Regulatory proceedings, lawsuits and criminal indictments threaten penalties in the billions. The utility warns of the financial effects. Everyone listens; everyone—including the statute—insists that whatever the full penalty should be, it must be moderated to keep the company functioning.
Why the different treatment? What are the consequences of protecting a company from its errors? And why assume the utility is irreplaceable?
Protecting a Utility from Its Errors: Five Costs
1. Subsidies: Reducing the fines to save the company violates regulation's first principle: Cost-causers must be cost-bearers. If the utility doesn't bear its costs, someone else does. When a pipeline explodes, taxpayers fund the first responders, insurance premium-payers fund the hospitals, and ratepayers pay for the inefficiencies that flow from regulatory lenience.
2. Dulled motivation: Penalties function not only as punishments but as inducements--to avoid mistakes and improve performance. Competitive markets induce performance because the seller's choice is stark: Please the customer or lose the customer. . . .