Believe it or not, utilities did used to be innovative. From the 1890s until 1970, with a brief lull in the 1920s, America had a functional arrangement with electricity utilities. It’s a sort of deal. Investor-owned utilities are allowed to monopolize a certain region with a guaranteed customer base. But in return, they have to offer good service, invest in equipment to make their operations better, and charge reasonable prices set by state-level utility commissions. (Note that one traditional American approach of fostering competition is absent here; antitrust law can play a role here or there, but the gist of the utility model is that wires or connections to the home create ‘natural monopolies’ that must be addressed through overt regulatory control.)
Until the 1980s, regulators, while not perfect, tended to uphold this deal. America was a land of cheap electricity. But it stopped working in the 1970s, immediately after an energy crisis and deregulation kicked off by Jimmy Carter.
experts have created a host of bad utility-specific models for calculating a reasonable return on equity. Utilities even created a certifying body, the Society of Utility Regulatory Financial Analysts (SURFA), to train their experts. To give you a sense of what it really was about, SURFA, founded in 1977, about the time the risk premium began widening, was originally called the ‘National Society of Rate of Return Analysts.’ There is no reason why utilities should have a different financial language than other corporations, but they do. Second, public advocates, from environmentalists to public interest consumer groups, actually use the same models as utilities, because they don’t understand or lack the confidence to put forward a much lower return on equity proposal. They often believe the argument that utilities need high rates of return to foster investment. Third, Ellis noted that utilities can spend as much money as they need to on these rate proceedings,
Bad idea to let the governed industry decide what the risk premium should be.
