3 ms·

if profit is capped at 10% of revenue then it sounds like the incentive is to raise revenue, not lower expenses.

dumbfounder 2y ago
That's what s1artibartfast is saying. They want things to be very expensive because that's how they make the most money. Lowering expenses means they need to lower their prices which lowers their revenues which lowers their profits.
InitialLastName 2y ago
If it costs $90 to deliver a day's energy to a customer, they can charge $100, making $10 profit per customer-day. If it costs $900 to deliver a day's energy to a customer, they can charge $1000, making $100 profit per customer-day. Where is the incentive to reduce expenses if the only way you can raise profit is by raising expenses?
s1artibartfast 2y ago
Indeed. The same is true of healthcare insurance in the US. The Affordable Care Act instituted an 80/20% rule for insurers. Naturally, the best way to increase profit is to drive up the cost of healthcare.
ghouse 2y ago
I do not believe that this is accurate. California Investor Owned Utilities (IOUs) have had their profit decoupled from revenue since 1981. [0] The Federal Energy Regulatory Commission (FERC) allows for an equity rate of return on assets of approx 10% (9.3). [1] As a result, California IOUs don't have an incentive to sell more power, but do have an economic incentive to build more assets. Asset construction is driven by growing peak demand. Or under-investment in O&M. [0] https://www.sciencedirect.com/science/article/abs/pii/S0957178796000124 https://www.sciencedirect.com/science/article/abs/pii/S09571... [1] https://www.utilitydive.com/news/ferc-lowers-pge-transmission-returns-roe-consumer/620869/ https://www.utilitydive.com/news/ferc-lowers-pge-transmissio...
- neilknowsbest 2y ago
  I believe there is a distinction between profits for "transmission" specifically and for electric utilities more broadly. The FERC ruling that you reference is for PG&E's transmission assets, i.e. high voltage lines and transformers and such. I assume that their retail electric business is regulated by CPUC and has a different profit/revenue/whatever arrangement.

That's what s1artibartfast is saying. They want things to be very expensive because that's how they make the most money. Lowering expenses means they need to lower their prices which lowers their revenues which lowers their profits.

InitialLastName 2y ago

If it costs $90 to deliver a day's energy to a customer, they can charge $100, making $10 profit per customer-day. If it costs $900 to deliver a day's energy to a customer, they can charge $1000, making $100 profit per customer-day. Where is the incentive to reduce expenses if the only way you can raise profit is by raising expenses?

s1artibartfast 2y ago

Indeed. The same is true of healthcare insurance in the US. The Affordable Care Act instituted an 80/20% rule for insurers. Naturally, the best way to increase profit is to drive up the cost of healthcare.

ghouse 2y ago

I do not believe that this is accurate. California Investor Owned Utilities (IOUs) have had their profit decoupled from revenue since 1981. [0] The Federal Energy Regulatory Commission (FERC) allows for an equity rate of return on assets of approx 10% (9.3). [1] As a result, California IOUs don't have an incentive to sell more power, but do have an economic incentive to build more assets. Asset construction is driven by growing peak demand. Or under-investment in O&M. [0] https://www.sciencedirect.com/science/article/abs/pii/S0957178796000124 https://www.sciencedirect.com/science/article/abs/pii/S09571... [1] https://www.utilitydive.com/news/ferc-lowers-pge-transmission-returns-roe-consumer/620869/ https://www.utilitydive.com/news/ferc-lowers-pge-transmissio...

neilknowsbest 2y ago
I believe there is a distinction between profits for "transmission" specifically and for electric utilities more broadly. The FERC ruling that you reference is for PG&E's transmission assets, i.e. high voltage lines and transformers and such. I assume that their retail electric business is regulated by CPUC and has a different profit/revenue/whatever arrangement.