3 ms·

I don't understand so when a natural gas plant is built they adjust rates upward? Isn't that the opposite of supply and demand?

AdamJacobMuller 9y ago
Yes, but, this is not an open market, this is the CPUC and they have a captive audience they can force to pay whatever they want to force them to pay.
jessaustin 9y ago
There is very little competition in electrical utilities. The theory is that in order to prevent competing electric lines from being built, government must control prices. However, many utilities still have private investors, who want prices to go up. Since existing prices already pay these investors a fair return, they have to find a more objective reason than "we want more money". Often this takes the form of unnecessary capital spending, the costs of which can be inflated and passed on to captive customers. After all, if the capital spending (e.g. on a power plant) were necessary, it would itself generate a return (e.g. by selling power) that would attract investors. The public is victim of the principal-agent problem when public utilities commissions approve such arrangements. This has led to a situation in which California and other states have more generation capacity than they need.
caminante 9y ago
No. In theory, that new gas plant is "planned" and replacing aging capacity, while meeting expected demand. Rates are separate. Many power utilities are granted a monopoly, especially the transmission (high voltage, long distance) and distribution ("last mile" / neighborhood wires) horizontals as they're true natural monopolies. In exchange for that concession, their profits are capped. The cap is a function of their "rate base" -- i.e. qualifying capex -- and an approved rate. These rates are adjusted periodically, requiring public utility commission (State) or FERC (federal) rate setting sessions. For example, "Total Revenue Requirement = Rate Base [assets] × Allowed Rate of Return + Expenses" [0] Without having looked into this, it's easy to over-estimate how easy (hard) life as a public utility is. [0] http://blog.aee.net/how-do-electric-utilities-make-money http://blog.aee.net/how-do-electric-utilities-make-money
- spangry 9y ago
  This kind of regulatory response to natural monopolies can (and does) result in 'gold-plating'. It incentivises profit-maximising monopolists to over-invest in qualifying capital: even though their ROI remains the same, their absolute profit grows larger. However, there's no easy solution here: natural monopolies are a genuinely tricky public policy issue. Alternative solutions that come to mind are more direct price controls or public ownership. I'm not suggesting these are superior alternatives; just throwing them in there to provide more grist for the conversational mill.
  - DrScump 9y ago
    California is an expert at this. https://en.wikipedia.org/wiki/California_electricity_crisis https://en.wikipedia.org/wiki/California_electricity_crisis

AdamJacobMuller 9y ago

Yes, but, this is not an open market, this is the CPUC and they have a captive audience they can force to pay whatever they want to force them to pay.

jessaustin 9y ago

There is very little competition in electrical utilities. The theory is that in order to prevent competing electric lines from being built, government must control prices. However, many utilities still have private investors, who want prices to go up. Since existing prices already pay these investors a fair return, they have to find a more objective reason than "we want more money". Often this takes the form of unnecessary capital spending, the costs of which can be inflated and passed on to captive customers. After all, if the capital spending (e.g. on a power plant) were necessary, it would itself generate a return (e.g. by selling power) that would attract investors. The public is victim of the principal-agent problem when public utilities commissions approve such arrangements. This has led to a situation in which California and other states have more generation capacity than they need.

caminante 9y ago

No. In theory, that new gas plant is "planned" and replacing aging capacity, while meeting expected demand. Rates are separate. Many power utilities are granted a monopoly, especially the transmission (high voltage, long distance) and distribution ("last mile" / neighborhood wires) horizontals as they're true natural monopolies. In exchange for that concession, their profits are capped. The cap is a function of their "rate base" -- i.e. qualifying capex -- and an approved rate. These rates are adjusted periodically, requiring public utility commission (State) or FERC (federal) rate setting sessions. For example, "Total Revenue Requirement = Rate Base [assets] × Allowed Rate of Return + Expenses" [0] Without having looked into this, it's easy to over-estimate how easy (hard) life as a public utility is. [0] http://blog.aee.net/how-do-electric-utilities-make-money http://blog.aee.net/how-do-electric-utilities-make-money

spangry 9y ago
This kind of regulatory response to natural monopolies can (and does) result in 'gold-plating'. It incentivises profit-maximising monopolists to over-invest in qualifying capital: even though their ROI remains the same, their absolute profit grows larger. However, there's no easy solution here: natural monopolies are a genuinely tricky public policy issue. Alternative solutions that come to mind are more direct price controls or public ownership. I'm not suggesting these are superior alternatives; just throwing them in there to provide more grist for the conversational mill.
- DrScump 9y ago
  California is an expert at this. https://en.wikipedia.org/wiki/California_electricity_crisis https://en.wikipedia.org/wiki/California_electricity_crisis