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Your entire line of reasoning is based on the assumption that risk of fire is unavoidable and such we don't want to exert pressure on them to reduce that risk a

by Faark 8y ago

Your entire line of reasoning is based on the assumption that risk of fire is unavoidable and such we don't want to exert pressure on them to reduce that risk any further than regulation requires. I disagree. Government should regulate the minimum required to make society function. If citizens decide they don't want to rebuild their burned down homes every once in while, then this might include some minium safety requirements utilities have to satisfy or be criminals. This has little to do with pricing risk. Beyond that, we want to find the best cost/benefit trade-offs. And finding those best trade-offs is what we use competing private companies for in the first place. That's the reason the gov hands the privilege to run the local utility to whatever company makes the best offer running it. Only in return do we allow them to keep additional profits competitors couldn't match. Ideally, this should include all externalities, like this preventive measures vs insurance cost trade-off. I understand the price has to payed by citizens anyway. Either directly to the utility, or by tax funded subsidy, if they want to cap prices. Either is fine. But if we use profit generating companies to optimize cost, then it just makes no sense to not have them optimize on a significant chunk of cost society will suffer.

Mvandenbergh 8y ago
>Your entire line of reasoning is based on the assumption that risk of fire is unavoidable and such we don't want to exert pressure on them to reduce that risk any further than regulation requires. Not quite. I think some risk of fire is unavoidable but I'm not saying they should do only what the regulatory minimum is and no more. If we assume that there is a relationship between the amount of "effort" (whether that is money, management insight, or whatever) they put in and the fire risk then we want them to be incentivised through most of the range of that function. If they are good at preventing fires, investors and management should benefit, if they are bad then they should pay penalties. The point I'm making if that single events can cause 10s of billions of dollars of damage, and if the trigger for that event is something which can be reduced but not eliminated, then the incentive structure ends up being much more like a lottery ticket than a smooth relationship that rewards diligent management. If they were instead fined a substantial amount (say $100m) every time one of their assets caused any kind of fire in a risky area without being liable for all the damages (which is not within their control) then I think that would drive a much more effective set of incentives. It's fundamentally a contrast between a light-touch regulatory mechanism with uncapped tort liability + insurers requiring certain behaviour and a heavier regulatory incentive where a regulator requires that behaviour but with the liability of the consequences held elsewhere. To be fair, in many cases the US uses the former and it may just be my European utility regulation perspective that makes me think it is odd since we typically use mechanisms of the second sort. My intuition says that when the cost of the consequences has a power-law type distribution (most fires cost very little but a few cost billions), it is more efficient to use the latter model rather than rely on insurance models but that's admittedly not based on any detailed analysis.

by Faark 8y ago

Mvandenbergh 8y ago

>Your entire line of reasoning is based on the assumption that risk of fire is unavoidable and such we don't want to exert pressure on them to reduce that risk any further than regulation requires. Not quite. I think some risk of fire is unavoidable but I'm not saying they should do only what the regulatory minimum is and no more. If we assume that there is a relationship between the amount of "effort" (whether that is money, management insight, or whatever) they put in and the fire risk then we want them to be incentivised through most of the range of that function. If they are good at preventing fires, investors and management should benefit, if they are bad then they should pay penalties. The point I'm making if that single events can cause 10s of billions of dollars of damage, and if the trigger for that event is something which can be reduced but not eliminated, then the incentive structure ends up being much more like a lottery ticket than a smooth relationship that rewards diligent management. If they were instead fined a substantial amount (say $100m) every time one of their assets caused any kind of fire in a risky area without being liable for all the damages (which is not within their control) then I think that would drive a much more effective set of incentives. It's fundamentally a contrast between a light-touch regulatory mechanism with uncapped tort liability + insurers requiring certain behaviour and a heavier regulatory incentive where a regulator requires that behaviour but with the liability of the consequences held elsewhere. To be fair, in many cases the US uses the former and it may just be my European utility regulation perspective that makes me think it is odd since we typically use mechanisms of the second sort. My intuition says that when the cost of the consequences has a power-law type distribution (most fires cost very little but a few cost billions), it is more efficient to use the latter model rather than rely on insurance models but that's admittedly not based on any detailed analysis.