As regulated businesses, utilities’ incentives differ from those of many businesses. Citing a study in the Yale Journal of Regulation, economist Timothy Taylor explains why these incentives argue against a substantial buildout of a transmission network. This—even though the government is trying to force an “electric” economy.
Taylor points out that shareholders of utilities are more like creditors than owners. Regulation ensures them a decent rate of return (except in cases of bankruptcy). But regulation also keeps profits from getting all that high. Owners can be fairly complacent.
In contrast, the ratepayers benefit or lose depending on the operation of the company. A well-run company will keep rates low. A poorly run company will force rates up.
Given their incentives, shareholders are not likely to want the company to make major increases in the electric grid, says Taylor. Doing so would open more areas to competition from other fuel sources. It would also “involve taking on a lot of debt and probably (given regulated prices) will not improve shareholder returns.” The ratepayers would probably benefit from the new competition, but they are not decision-makers.
Taylor is skeptical of the solution proposed by the study authors, Aneil Kovvali & Joshua C. Macey. They recommend putting more ratepayers on company boards. Taylor doubts that would have much of a beneficial effect. Mainly, he wants to alert the public to the incentive problem.
Image by Anh Lê khắc on Pixabay.