Page 43 - Sustainable Cities and Communities Design Handbook

20 Sustainable Cities and Communities Design Handbook

On the positive side, accountability for mistakes under the traditional
system is largely shifted to ratepayers with little recourse to investors. The
example of Diablo Canyon nuclear plant is instructive. Cost overruns make the
power too expensive to sell under normal expense recovery calculations, even
though PG&E wanted to shift all the burden of cost to the ratepayers. The
regulator, the CPUC, wanted the utility to absorb most of the burden. Finally a
compromise was reached in which the power was sold to customers at a rate
well above the average of other sources of power (12 cents/KWh), based on
performance criteria.
If performance was below a set level the balance would be absorbed by the
company. In practice, before deregulation, the plant performed reliably above
the minimum, and costs were passed on to consumers. Under deregulation,
presumably, cost overruns on plants like Diablo Canyon would not be
competitive and would lead to huge financial losses to the utility.
From a conventional economic point of view, under regulation the public
regulator protects the utility from some risk for the investment decisions that
are made. The fact that the utility can pass on costs shifts some of the risk and
allows for poor investment decisions. Under deregulation, this risk-buffering
function will be removed, subjecting these decisions to competitive markets.
A counterargument is needed, however. California’s experience has
repeatedly shown how private companies would have made horrible decisions
if it were not for the regulatory system to enforce restraint. If Diablo Canyon
was a problem, one can only imagine the financial crisis of the utilities and the
state if the 12 nuclear plants that were planned for construction were actually
built. While the regulatory system is not capable of micromanaging or of
assuring that all investment decisions are wise, the fact that there is a second
opinion may lead on average to fewer mistakes.
Good decisions are benefits for which there should be a public benefit, not
just private gain, especially for those low-cost sources of power that result
from the collaboration between the public through the regulator and the private
utility. The benefits of the shared risk between the utility and the guaranteed
pass through of the costs to the customer has made some projects feasible and
has assured low costs of capital because investors sense a guaranteed return on
their investment. Indeed the whole utility industry is more of a public trust
than is an industry such as oil refining. Many of the resources used in the
generation of power are derived from public lands, especially hydro, and the
power lines are typically acquired through the use of eminent domain
proceedings to force access or sale of land; the fact that power cannot be easily
stored means that the entire integrated system is critical.

Politicized Priorities Excluded

The economists point to the fact that regulation reflects politicized priorities
that counter the best economic interests of efficiency and low costs. The