Detroit Edison Co. (DE) has received approval from the Michigan Public Service Commission for
10-year sole-supplier contracts for electric power and related services with Chrysler, Ford,...
(em whose inspiration is often more political than economic.
That consumers can lose under the compact is becoming ever more obvious, as utility after utility facing competition suddenly discovers that it has hundreds or thousands of redundant employees. Despite these needlessly high costs, utilities have usually earned sufficient returns to keep them in the good graces of the capital markets. In no unregulated industry do inept sellers enjoy so low a probability of failure. In light of this long history of inefficient supply, why should customers be required to pay even more for the right to leave utility service?
The utility's obligation to serve cannot by itself rationalize any stranding recovery. Doing so requires a further showing that the duty to serve forced investment in uneconomic plants. The nuclear plants that make up the core of alleged strandings were inefficient, unneeded, and known to be so at the time of construction commitments. Utilities often decided to start or restart nuclear construction in the face of adequate reserves and slackening demand. If compensation is a matter of equity, why should those utilities with the poorest foresight collect the booked value of nuclear mistakes while those that had better vision recover nothing? Utilities that told investors the truth and wrote down their nuclear plants will go uncompensated, while those who kept those plants on the books will win. Posing as fairness, compensation for stranding gives the most to the least competent.
Competition and Disallowance: No Analogy
Regulators sometimes disallow certain "imprudent" (typically nuclear) investments from rate base. Critics attack these disallowances because of the asymmetry that arises when regulators average good utility projects with bad ones in calculating the allowable return. They argue that selective disallowance of projects gone bad lowers the realized return below the allowable level, impairing the utility's ability to obtain capital and confounding investor expectations.
William Tye and others have written that retail competition will affect utilities in the same way as a disallowance proceeding. In other words, for investors in regulated firms, the surprise emergence of competition will be financially equivalent to a disallowance. Again, because of asymmetry, this group argues that regulators should delay the arrival of competition, or else utilities should receive compensation for their writedowns.
Regulation indeed limits returns on assets that proved wise investments, but with no disallowances it also guarantees the same return on unwise investments because customers cannot go elsewhere. If there is competition, unwise investments will lose out; wise ones will earn little more than competitive profits (em that is, the rate of return that regulators should be setting. Suppressing competition throws uncompensated risks on ratepayers, requiring them to pay both the booked cost and authorized return on investments that could not be recovered by a competitive seller. In a competitive market, those who invest wisely (or luckily) survive and prosper. Regulated rates, by contrast, can be set to give even the most incompetent monopoly utility a return it can survive on.
But a more fundamental difference lies between a retroactive cost disallowance and the emergence of competition. Disallowances cause wealth transfers