Monday, September 3, 2012

The Incentive To Abuse

Entergy, the behemoth "public utility" which "serves" New Orleans and most of south Louisiana slammed by Hurricane Isaac, is - in economic parlance - a regulated monopoly.  The main, perhaps the only, problem with that is nowadays almost no one, inclusive of the totality of private citizens and public officials, betrays the slightest understanding of the term.  And it is no small problem.

In fact, it is central to solving the bedeviling riddle invented to stifle and straight jacket the righteous outrage and anger - nay, fury - among the hundreds of thousands of citizens still left sweltering, suffering and - in some cases - at imminent risk of expiring during an excruciatingly long, Bataan Death March of a service restoration campaign, a week after the initial attack of Issac.  That riddle goes pretty much like this:

"There is no hard evidence of a conscious decision by Entergy to delay restoration, fail to make plans for rapid restoration, or even not go after it full bore - given the fact of having recruited and brought in thousands of contractors and personnel from around the country at great expense to assist in the effort.  Moreover, they are losing money every minute that a customer is off line and not running up the electric bill, so why wouldn't they do everything humanly possible to get this done quickly?"
Sad to say, most people, including most elected officials, seem unaware of the fallacy embedded in that superficially logical line of reasoning.  It is this: they are not losing money, they never do.

A regulated monopoly like Entergy has no economic interest in efficient operation.  Ironically, just the opposite is true.  By law, they are guaranteed a fair rate of return or profit, which in traditional economic terms means all capital expended plus an amount ranging anywhere from 3 to 7 percent above the current and near term projected rate of inflation.  That means they have a built-in incentive to blow spend as much as they can "justify" to the public service regulatory body, in order to increase the overall amount of money they will make.  In other words, it is literally a case of  the more they spend, the more they make. Indeed, unlike businesses which operate in a competitive market, spending more is the only way in which they can increase their revenue stream and profit.  Such is why they always lust after the most expensive options - like nuclear power plants (risk to public be damned) - which they can get the regulators to sign-off on, as they build the cost into their rate base.  So it is, gentle reader, distressingly, depressingly, and inevitably true that despite the fact you are not "running the meter" during this outage time, the rate you will ultimately be assessed over the long term, when finally back to receiving the service, will be adjusted to cover all of the cost of this restoration campaign, along with the revenue that Entergy would have enjoyed had there been no outage at all.  That is the legal framework, and there are many, many very sound reasons why such a model is the very best for the provision of an essential public necessity.  The "economy of scale" feature in conjunction with the critical "public good" nature of this service justifies the monopoly character of the undertaking, but in turn magnifies the intense importance of serious and strong regulation, religiously faithful to the public interest.  That strong regulation, however, is not what we are seeing here.
 Today, we have largely clueless public officials, a completely misled populace, and airheadedly vapid, ignorant and corporately corrupted media. The key characteristics of the current stupid zeitgeist are the mind numbing, drug-like effects of the false promises, precepts and pronouncements peddled by the regulation hating so-called supply side economic salesmen left over from the Reagan era debacle, which continues to visit ruin on the middle class, and worse on the poor. All of which makes the rich and the extremely rich extremely happy - just as it was always intended to do. 

It is also why Entergy operations are so opaque.  The company has a core economic interest in remaining inscrutable, so as to not only more easily get by with but actually immensely benefit from an impenetrable and yawning lack of efficiency in their operations. All at the cost of our ever shabbier and shredded pocket books, and utterly disdained human pain and suffering.

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