The Money of Monopoly

TL;DR: Most people get their electricity from regulated utilities in the United States. The financials of a regulated, regional monopoly that operates outside of the free market are somewhat fascinating. Somewhat.

Despite how connected our work is to regulated utilities, I’ve never bothered to do any research on how the finances work.

As of noon today, what I knew was limited to the following:

• The big electric companies are regional monopolies, meaning their territory can be drawn on a map and they don’t really have competitors within those bounds
• Profits are capped by state/local regulation to remove the possibility of price gouging
• Some types of expenditures seem preferable because they can contribute to profit

So I did some digging. You’ll have to let me know if I’m missing something big or misunderstanding any of these discovered details.

Operating Expenses vs Capitalized Expenses

I really like the simplicity of an example spelled out in this article. If I understand it correctly, an electric company can’t profit from its operating expenses, but it can profit from capitalized expenditures. But what do these categories include? Let’s see if you can sort the following list into the correct category:

1. Salaries
2. Software
3. Transmission/Distribution Poles
4. Buildings/Rent
5. Equipment (Transformers, etc)

If you guessed that 1,2, and 4 were operating expenses, you’d be right.?

I wasn’t right. Because capital expenditures seemed like an investment in providing more reliable service, I was surprised to see software off that list. But I’m curious if that is a universal truth, or if the process of sorting costs between CapEx and O&M is much more subtle. That is—are categories of expenses all one or the other? Or is the accounting much more complicated? I’m betting it's the latter.

Rate Case Submittal

Another interesting piece of this is how utilities submit a proposal to raise prices. When customer prices are no longer able to cover the cost of providing service, a formal process begins in which the appropriate regulator reviews the evidence so they can render a decision.?

Ugh. I do not like the words that I just used to describe that. Let’s try again.

When an electric utility feels like it can’t provide good service at its current price, it can ask the governing body (like its PUC) for permission to raise its rates for customers. They put together a proposal with all the numbers and projections for review. The rate case seems to often yield a profit margin of roughly 10%.

Rate Shopping

If all this isn't complicated enough, many customers can also shop suppliers to try to take advantage of special power prices that are below the standard offer. Seems like that would mean there's another economy involved in this—that of suppliers, who appear to be alternative energy providers working alongside the utility through their distribution facilities. That might have to be a research project for another day...

I’m very glad that my electricity prices are directly tied to the costs it takes to deliver it to my home. I do, however, wonder if our legacy model of measurement of expenses and application for rate changes with set profit margins is yielding the long-term results intended.?

I’m glad people a lot smarter than me are working hard to make our grid safer and more reliable, and also to make sure that the meta-economics of regulated utilities is moving us in the right direction!