Regunberg Meddling with a Model Beyond His Ken

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This isn’t the morning I become an expert on National Grid’s business model, but a couple of obvious responses leap to mind upon reading Providence progressive Democrat Representative Aaron Regunberg’s op-ed in yesterday’s Providence Journal.  Quote #1:

National Grid, the multinational corporation with a virtual monopoly on our utility system, is doing quite well. Last year, the company reported profits — not revenue, profits — of $4.59 billion, a 13 percent increase for the year. Given these enormous sums, it is no wonder National Grid’s proposal to increase electricity rates by 53 percent is drawing strong opposition. It should be.

Note the lack of context.  That profit was off total assets of about $59 billion, so it’s about 7.5%.  Of course, the majority of National Grid’s business is out of the United States, and Rhode Island is the smallest of its four jurisdictions in the United States.  For fiscal year 2016-2017, National Grid saw a 7.7% return on equity in Rhode Island, which has a rate base of $1.5 billion.  That would be around $116 million — a lot of money, sure, but the return in Rhode Island was the second lowest of Grid’s four U.S. properties, and gas was much more the driver than was electric, which is Regunberg’s topic.

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Is that too high?  Maybe, maybe not.  But Grid’s monopoly is a creature of government, and part of that negotiation between the private company and the regulators guarantees profits, especially on things like renewable energy.

Quote #2:

Electricity prices are based on yesterday’s predictions. ISO-New England, the group that manages our region’s energy market, holds auctions three years in advance to make sure we have the power supply we need. The energy we secure today will not be used until 2020. The energy we are paying for now was purchased in 2014. That year, they predicted a deficit, so today’s prices are higher.

But the supply shortages predicted in 2014 have been resolved. Capacity has been expanded, in large part because of increased energy efficiency and renewable energy growth.

I’m not sure Regunberg understands the function of prices in a market.  Prices are essentially a signal to economic actors (consumers, companies, etc.).  Higher prices are a signal that the demand is outstripping the supply, so it is worth providers’ while to expend more effort to enter or expand in the market and its worth consumers’ efforts to limit their use.  In other words, the “supply shortages” were resolved mainly by raising prices.

This includes the two reasons that Regunberg gives.  Prices have a direct effect on capacity by attracting interest in the area and making it possible to profit off of activities that are costlier to undertake.  This is why guaranteed high prices were necessary to make off-shore wind plausible.

Guaranteed profits also play into the increased energy efficiency that Regunberg mentions.  Thanks to state law, National Grid doesn’t lose anything when its clients use less energy.  If that weren’t the case, its incentive would be to lower prices in order to increase use.

Note, by the way, Regunberg’s use of the term “auction.”  In one way or another, that means people bidding to provide energy.  Because this all happens years in advance, there is some risk to the guesses, and if the potential for profit isn’t high, then nobody will bid.

Is National Grid making out too well in this deal?  Honestly, I don’t know, and neither does Regunberg.  But it makes for good demagoguing to rile people up against a foreign company that actually makes a profit.

A responsible legislator would be going after the regulators over whom he has some actual oversight legitimacy, beyond riling up mobs against a private company.  Either Rhode Island government has to trust its regulators, or it should free up the market.  My preference would be the latter; one suspects progressive Regunberg’s objective is to grow government, so that’s off the table for him.

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  • Raymond Carter

    Maybe the geniuses on Smith Hill will nationalize all the utilities.
    Then we can be sure they will be well managed and corruption free…

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