Duke Energy Corporation
In Reply To:
Duke's profit being capped?

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By Curmudgeon44
September 10, 2003

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First of all, I agree with you about Duke being the best. They can produce the same product cheaper than many other utilities.

Last point first: In a nutshell I believe DUK has a range of allowed return in this service territory, if it is efficient they can earn somewhat more (an explicit incentive to efficiency). If DUK is more efficient than originally anticipated, it will earn more than the maximum allowed rate of return. That is unacceptable to the regulators and the utility has to give the excess back in some form. In my opinion you WANT that to happen because no other way can you be sure of earning the maximum.

Are you sure about this being a problem with the free market? Because the traditional electric industry is anything but a free market, it is administered from top to bottom. The regulators may have the best intentions (occasionally they don't), but they are part of a symbiotic system where the utility benefits as much as the people being served.

The key issue is whether the customers in South Carolina (SC) really have anything resembling a free right to choose a different supplier. Traditionally a utility is given a service area and all the customers are *required* to buy from the one utility in the area. In return the utility is *required* to serve anybody in that area who wants to be a customer. Usually there are many other conditions, such as charging a uniform rate to all similar customers in the area, the PUC or equivalent body will have a duty to see that nobody is discriminated against.

The bottom line for the utility is they almost always arrive at a cost-plus rate of profit, for every expense that is prudently incurred. There's lots of testimony as to what is and isn't prudent, lots of man-hours expended in maintaining the very regulatory system (which I used to be part of), but I am convinced the regulated utility system is philosophically consistent and makes a high effort to be fair.

In the end the utility has a sweet place to exist despite the never-ending *appearance* of combat and strife. Because ultimately the PUC is responsible for the financial health of the utility even they never want to admit that. They can say any critical thing (and usually do), they can incur minor penalties, but if there is ever a *major* dollar penalty the political fallout is intolerable -- see how seldom a regulated utility ever has gone bankrupt.

Of course I am speaking in generalities. If there is something specifically unfair about SC's regulatory decision, that might change things. But I have become used to seeing a lot of marginal, dubious decisions in a regulatory environment where things turn out very well for the utility in the end.

Best of luck -- C44

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