All over the United States you will see electric, gas, steam, sewer, and telephone utility workers reading newspapers in the cabs of their trucks – with the truck idling - so it's cool in the summer and warm in the winter.
But you haven’t ever seen a United Parcel Service or a Budweiser or a Staples delivery truck driver reading a paper in their cabs, have you?
Why is that…?
Are the utility workers more interested in news? Are they reading papers in the cab while they are waiting for spare parts to arrive on the job? Coffee break?
ROR is the answer. Public utilities in the US are almost all regulated under a Rate of Return model.
‘The ROR regulation provides no incentive for the firms to minimize costs, for if they reduce costs so that their returns exceed the permitted level, prices will be reduced in step. Any surplus above the permitted returns arising from cost savings will be siphoned off to the Development Fund. Under ROR regulation, monopolies operate wastefully for the simple reason that there is no pressure for them to operate efficiently. Their returns are guaranteed even if they operate with high costs.” (from Regulating Monopolies in Utilities
and Telecommunications by Price Cap by Pak-Wai Liu) [1]
and Telecommunications by Price Cap by Pak-Wai Liu) [1]
When the Dominion gas company – and any other utility- applies to the Public Utilities Commission of Ohio [2] for approval of their rates the utility is guaranteed that it will make a certain “acceptable” Rate of Return on its capital investment and its costs of operation. Utilities are supposedly not allowed to make too high a return, and are generally guaranteed that they will not lose money.
With this model, whether the worker is reading the newspaper or getting the job done doesn’t really matter to the utility, because at the end of the year the cost of the worker is carried against the “profit” from the customer income derived from the delivery of the utility service. If the job takes one day, or a week, it doesn't negatively affect the annual profit of the utililty. If labor costs are large, or labor costs are small, the rate of margin (profit) that the utility is allowed by PUCO is the same. Larger equipment and labor costs can actually increase the profit of a utility when the ROR is applied to those larger costs.
Clearly, especially now when our nation needs to become more efficient to pull us up in the global economy, the ROR method of public utility regulation is obsolete.
Do you think you will see any change in this behavior?
Or will our politicians and PUCO continue to roll over?
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