Regulators should ensure that changes to rate design seek to balance consumer and utility interests. Rates that are intended to insulate utilities from economic and technological change while...
Capitalism Debates Socialism in Honolulu
Hawaii Considering Alternatives to Private Sector Ownership
The State of Hawaii has launched an inquiry that could lead to the biggest takeover of an investor-owned utility since New York State bailed out the Long Island Lighting Company in 1998. Hawaii just reopened a more than century-old debate about whether the private or public sector should provide electricity to its citizens.
Lawmakers in Hawaii are really asking three interconnected questions. Do we need stockholders or shareholders to finance our electric utility? Are we comfortable with private sector management setting goals for the local electricity business?
If the electric business is run publicly as a not-for-profit, how will we set rates? There will be no need for a state public utility commission to set a return on equity. The new public entity won’t have any equity.
Some states defer to the primacy of local political control. Others regulate municipally-owned entities as if they are privately-owned.
In our view, the chief distinction between public and private electric utility systems is how they finance their assets. Other than that, electric utility assets are pretty much the same in terms of power generation, transmission and distribution. Same business.
Private companies raise money not only by selling debt, but also by selling shares of stock to the public. The stockholders, in return for providing so-called risk capital, receive ownership of the company through an elected board of directors. They in turn appoint senior management.
The biggest difference to us between public and private ownership is the malleability of the latter. Privately-owned utility companies are routinely bought, sold and merged. But more importantly, they can also invest or diversify into unrelated lines of business.
They can, in short, take more business risk. Stockholders benefit when their share prices increase, and suffer in periods of stock market decline. Meanwhile, relatively free from market turmoil, bondholders receive agreed-upon interest plus eventual return of principal.
Yes, there is an asymmetry there. But that is by design, based on which investors take more risk.
The bondholder effectively grants the stockholder control of profits, to be paid out in dividends or reinvested in return for a prior claim on interest and principal.
Public power companies have a few tricks too. They have a less-complicated less-expensive senior management structure. They can