Ratepayers’ “Ownership” Stake

Below is one of the comments I received on my January 2012 essay:

I recently read your essay "Competition for the Monopoly:  Why So Rare?" in the most recent Cruthirds Report. . . . I tend to agree with about 99% of the essay, but want to quibble over one point that I often hear quoted with regard to utilities . . . That point is expressed in item 4, sub-point 2: "the utility's customers have paid for [infrastructure] through their rates, so they deserve to receive its remaining economic value".

I often hear variations on this type of ownership interest on behalf of ratepayers expressed as somehow part of the "Regulatory Compact," but I have never seen a rationale (as opposed to an assertion) that even attempts to justify this mindset, with which I thoroughly disagree.

In my view, in a regulated monopoly, the trade-off is that, in return for monopoly service rights, the customers get regulated rates. However, I cannot fathom why anyone thinks this also gives customers some sort of ownership stake or pre-emptive rights in the assets paid for by those rates. I argue that ownership remains with the owners, completely unfettered.

By analogy, no one seems to think that shopping at the local Kroger for ten years gives them an ownership stake or some sort of priority in services or prices at that grocery store. I don't see any reason why a utility being a regulated monopoly should make any difference with regard to that relationship. Prices paid for groceries fund capital investments at the grocery store no less than they do with a utility.

— Steve Huhman

Comments

Eric Witte

If a utility imprudently incurs a liability (by causing some environmental damage, for example), should that cost be borne by ratepayers or shareholders? If you subscribe to the "ratepayer ownership" theory, then ratepayers would be at least partially liable; if not, then not.¶ Note, however, that ratepayers may IN FACT have to bear the cost of a utility’s imprudent conduct regardless of a state's law and policy on the matter. If a utility does something that impairs its credit rating, it is difficult to shield ratepayers from bearing any part of the increase in the utility's financing costs. Perhaps the ultimate example of this problem is documented in FERC Order 500 (1987). In that case, natural gas pipelines had entered into “take-or-pay” contracts that, as events unfolded, were going to bankrupt the pipeline industry. FERC decided to (indirectly) compel ratepayers to bear much of the cost.¶ In short, if ratepayers ultimately cannot escape bearing a utility's equity-type risks, then it may make sense to grant to ratepayers equity-type benefits.

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