Nowhere are the failings of traditional utility regulation more evident than on Long Island. The New York Public Service Commission (PSC) has raised rates for the Long Island Lighting Co. (LILCO)...
then, saddled with rate-of-return regulation, many power companies will stop their competitive repositioning when they finish hunting around for nonessential workers to downsize.
When all the staff is gone, the fixed costs remain. Regulatory agencies need a real policy. There are practical limits to management options when power companies must market their securities to "widows and orphans." With such capital customers, and 15 to 20 years of depreciation still to go on installed assets, cutting the dividend and writedowns to market can offer a quick ticket to the golf course for some chief executive officers (CEOs). Since most CEOs average five years at the helm, utility balance sheets will remain sticky (em perhaps until it's too late.
Auctions, however, rapidly introduce competition without distorting or dislocating the market. A multiround auction can achieve maximum valuation for market access, on a short timetable. Winners gain rights to access the existing utility's assets and customer base under prescribed conditions. The license fees could go toward the utility's stranded investment, or perhaps fund a market-exit strategy.
As the FCC has demonstrated, public service and reliability issues can be readily accommodated within an auction scheme. Access conditions to a license could include an obligation to satisfy whatever public-service conditions the regulator deems appropriate (e.g., lifeline services, billing standards). An auction service fee to the regulator could also fund enforcement and market-management services provided by government in its referee role.
Cutting to the Chase
Two hundred years of auctions demonstrate the superiority of market solutions, and the inevitable triumph of new technology over underperforming assets. Auctions expedite introduction of innovative technologies on a distributed basis, effectively rationalize capacity, and correct market valuation to current levels. Auctions have also proven most effective in serving the public interest.
If we continue our current track to power deregulation, we all can use our PCS handsets and wireless video conference systems to debate what it means to existing assets. By then, however, technological development will have found a way for demand to avoid current inefficiencies (em leaving some balance sheets high and dry, with no place to go. t
Stephen Maloney is president of Devonrue LTD, a technology consulting firm that provides advanced computer simulations of multicompetitor markets for telecommunications and energy firms. Mr. Maloney has over 20 years' experience in the energy, communications, and semiconductor industries, and degrees in physics, mathematics, and operations research.
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