Utility Monopolies: Who Pays for Mistakes?

Naturally, when any organization suffers unanticipated expenses, it’s going to have to find ways to make up the shortfall in its budget. That’s exactly what happened to Ontario Power Generation (OPG), the provincially-owned power company responsible for generating about 70% of all the power consumed in the Canadian province of Ontario. A legal battle with customers ended up costing the company nearly $20 million. So, where did the company turn to recoup that amount? Well, to its customers, of course.

Here’s the story, via the CBC: Ont. electricity rates expected to rise next week

Electricity ratepayers in Ontario, already reeling from soaring prices, should brace for more increases.

The Ontario Energy Board agreed Tuesday to let utilities raise rates to recover $18 million they paid in fines and legal costs after charging consumers excessive interest on late payments….

Now most companies could only dream of passing along such costs to their customers. Some might even succeed. But most wouldn’t. Most would be hindered by the fact that, if they raise the prices they charge to customers, customers would simply buy from someone else. But electricity in Ontario (as in most places) is a monopoly: an organization called Hydro One has a monopoly on distribution of electricity throughout Ontario, and the power it distributes is produced by a small handful of organizations, the most significant of which by far is OPG. So, with the consent of the Ontario Energy Board (the relevant regulatory agency) all OPG has to do is raise its prices, and the company’s customers end up paying for the consequences of its legal tussle with…the company’s customers.

I don’t know much about the original lawsuit, but I do know that this was a predictable result of it. And that puts customers of utilities in a strange position. Sure, customers can sue the a utility when they screw up, but all the utility is going to do is turn around and raise your rates to get the money back out of you.

Now, just to be clear, I generally have nothing against this sort of monopoly. Electricity distribution is what economists call a “natural monopoly.” It’s crazy to have multiple competing sets of power lines running down to street. And, for that matter, it might well be crazy to let many multiple competing companies all run nuclear power plants (OPG runs several of those). But at any rate, it’s worth recognizing the effect that this monopoly (or quasi-monopoly) situation has in the event that the company screws up (say, by overcharging customers). The expenses incurred are entirely likely simply to be passed along to their captive customers.

By the way, Ontario Power Generation (whose only shareholder is the government of Ontario) had a profit of $333 million for the 4th quarter of 2010.

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Thanks to NW for the story.

3 comments so far

  1. Jeff Moriarty on

    Hi Chris,

    Interesting stuff. I wonder if you think it’s irrational for customers to sue. You say:

    “Sure, customers can sue the a utility when they screw up, but all the utility is going to do is turn around and raise your rates to get the money back out of you.”

    But there’s two “you’s” here: (1) the “you” who sues (a subset of customers, and (2) the “you” who absorbs the costs (all customers). (1) might be happy to sue, so as to “spread the costs” around to the much larger group (2).

    Perhaps your thought is that this is rational as an “individual” strategy but irrational as a collective one. Perhaps (2) should agree to a ban on lawsuits?

    Jeff

    • Chris MacDonald on

      Jeff:

      Good questions, and I don’t know enough about the original court case to give you good answers. I don’t know for example how many plaintiffs there were. But it does raise interesting issues — I hadn’t thought of the notion of banning lawsuits, but it certainly makes sense in some cases. At least, it does if we’re thinking as consequentialists. If not, we might then say that it’s important that justice be served, even IF consumers are “cutting off their noses to spite their faces,” as the saying goes.

      Chris.

  2. jilly on

    Perhaps we should consider what consumers are suing for. For example, had consumers sued to ensure that policies were changed to prevent the overcharge from occurring again, and to fire those responsible for the overcharge, that seems perfectly reasonable. The story suggests that there were no internal processes in place to have the complaints heard and dealt with, and establishing such processes (which would themselves entail an ongoing cost), might be a reasonable outcome. It would certainly be a crucial one if the “no lawsuits” idea was implemented. People always need recourse.

    Note that the consumers who sued would undoubtedly have costs of their own to bear, and it would be reasonable to expect the court to order that those costs be covered. The question of fines is an interesting one—it would be helpful to know how much of the judgment was in fines, and what would be done with those fines. Somehow, seeing the OEB as an injured party just doesn’t seem reasonable.

    I was interested to see that no time limit appeared to have been placed on the rate increase. An increase designed to recoup a specified amount should surely end when that amount is regained. Furthermore, I wonder about the term of the settlement. Giving the utility a reasonable time to meet its obligations would surely reduce the long-term costs.

    Finally, there is the question of municipal oversight. The original article contains the following quote:

    “To deny the utilities recovery would be to impose on their shareholders, typically the municipalities in which they operate, costs which they were compelled to incur,” the energy board wrote in its decision.

    “In the board’s view, no fair-minded person, cognizant of the facts of this case could come to a different conclusion.”

    And herein lies a serious problem. It is possible that no fair minded person would come to would come to a different conclusion, but I think it is fair to raise a question about whether oversight was adequate, and how municipalities responded to concerns raised by those who were overcharged.

    I wonder about the responsibility of a government agency to incur enormous costs to defend the actions of its employees (or of a government to defend its members). This is not to say that people who undertake difficult decisions on behalf of their employers should not be defended, but to suggest that decisions should not be defended automatically. Perhaps it is time to consider liability insurance as a standard part of an employment contract?

    Cheers


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