Investor-owned versus publicly-owned utilities – shareholders and customers versus just customers – is there an advantage either way for consumers?
Some basics first. Efficient, flexible, fast – hallmarks of successful utilities of any kind, and that will be especially true in the future. Companies with the ability to make the right financial moves, invest for real improvements, have the demonstrated ability to plan and execute well, and have bench strength to support customer needs will command attention and customer support…
…organizations that have built trust because of constant and obvious wisdom.
With that in mind, the Santee Cooper debate spurs that IOU/Public ownership question in South Carolina. The question is raging elsewhere, too. With an investor-owned utility center stage in California’s wildfires, the Haas Energy Institute at the University of California asked: Should the investor-owned utility be converted, in whole or in part, to a non-profit customer-owned cooperative or publicly owned utility.
The short answer – No.
Each kind of utility has had a place. Coops, public power, and IOU organizations have a role. Each serves significant land area, see map from the U.S. Energy Information Agency below.
- Cooperatives formed to serve largely rural areas that may not have attracted investor owned utilities in the past. They are typically smaller and local, often for the distribution of power generated by others. Important segments of the utility picture.
- Public power organizations are typically geographically concentrated. Often they are municipal, with modest power generation capabilities. The emphasis is distributing power.
- Investor owned utilities are like other companies on the stock exchange. They earn a profit for shareholders. IOUs usually do all the functions of the power industry from making power to getting it to customers. These are the largest of the three kinds of power organizations.
Does an IOU (with shareholders) detract from customer service versus companies that do not have to make a profit? North and South Carolina have all three utility business models. So, it seems worthy of a look at what the Institute says.
Here’s how the Institute frames it: “Paying profits to shareholders is also held up as a problem because IOUs must earn higher revenues to make those payments. Well maybe, but non-profit utilities also face a cost of raising capital. They just do it all through selling bonds, and paying interest on them, rather than also selling equity and paying returns to shareholders”
Six of one, half-dozen of the other, is the phrase that comes to mind. Check the report for its full explanation.
Trends in the utility industry may tilt that equation, though.
Accountability in the market makes a difference. The creative destruction of capitalism builds success and casts off failure. It’s been seen in both the Carolinas’ energy industry. Companies that did not make it are not around.
Some companies will make it. Others will not, and that is okay as part of the cycle of life in organizations.
Change in the electric industry is underway at an unprecedented pace. “This epochal shift in America’s power system creates as many opportunities for utilities as risks. But the key to unlocking this opportunity is finding ways to hold utilities accountable for creating these benefits, even as they undertake serious distribution system investments. Failure to do so may lead utilities down the very death spiral they seek to avoid.” (Source)
IOUs have oversight from state public service commissions. IOUs have accountability with many shareholders. Scrutiny is intense. Service territories with many customers can tap into the accountability that comes from combined shareholder responsibility and state regulatory oversight.
That checks two boxes at once for financial acumen and customer security.
About creative destruction:
From MIT Economics: “Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones. This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. Over the long run, the process of creative destruction accounts for over 50 per cent of productivity growth. At business cycle frequency, restructuring typically declines during recessions, and this add a significant cost to downturns. Obstacles to the process of creative destruction can have severe short- and long-run macroeconomic consequences.”
The Guardian, this summer.
The American Enterprise Institute: “Only 52 US companies have been on the Fortune 500 since 1955, thanks to the creative destruction that fuels economic prosperity.”