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Fortnightly Magazine - November 15 1995

like these would probably have led to bankruptcy and ruin. Instead, regulators allowed PG&E to avoid what would have been an extremely embarrassing prudence review by adopting an "incentive" ratemaking arrangement for Diablo Canyon. After a one-time writedown, PG&E's profits soared because of Diablo Canyon, and California regulators have subsequently declined to correct their error. The lesson here is that in a monopoly environment, utilities can expect to profit from their mistakes.

Now that California regulators are seeking to restructure the electric industry, the time is ripe to write down the value of these overpriced nukes. After all, authorized utility profit levels are typically set with the understanding that stockholders may not fully recover their capital investment. But when that risk threatens to become reality, utilities and regulators balk at making shareholders pay the price for management's poor judgment in building nuclear plants. Instead, regulators make it clear they intend to pass those costs on to consumers through a "Competitive Transition Charge."

This same sort of thinking is apparent in the current effort by Edison, PG&E, SDG&E, and Southern California Gas to pass on to consumers the costs associated with promoting the development of electric and natural gas vehicles. This particular example may well be unique to California, where freeway gridlock is a way of life for millions of commuters, particularly in Southern California. Faced with the growing discontent of heavily taxed voters, California lawmakers lack the political will to increase taxes to fund public transit. Nor are they willing to take a hard look at the land use and transportation policies that lead to freeway gridlock and the resulting decline in air quality. Instead, lawmakers and regulators favor hiding the cost of these promotional efforts in the cost of utility service for consumers.

Without question, automobile emissions contribute significantly to California's air-quality problems. Without question, the introduction of low-emission vehicles (LEVs) will ultimately improve California's air quality. But why should the captive customers of monopoly utilities be forced to pay for these efforts through increases in gas and electric bills? Many entrepreneurs in California are already at work on the design, development, and distribution of LEVs. These individuals are risking their own capital on these efforts. If they succeed, they will profit; if they fail, they may lose their investments. This is how capitalism works.

Free Enterprise=Free Ride?

Ironically, the same regulators who favor such hidden taxes are ardent supporters of "free enterprise." But forcing poor and disadvantaged consumers to bear the risk of investments that could ultimately earn profits for utility shareholders is not free enterprise, it's corporate "welfare."

If California utilities are allowed to raise rates to fund programs that promote LEVs, they will essentially be making a risk-free investment. If those investments are successful, utility stockholders will reap the profits associated with increased sales of gas and electricity. If the programs are unsuccessful, investors will have lost nothing. It's a great deal for the utility companies and their investors, but a lousy one for consumers. It is also a prime example of the monopoly mindset at work. In