Sunday, March 18, 2007

Brad's utility takeover looks like a non-starter

Bob Paul's wrote up a couple of good articles about it on his blog (1st and 2nd). Even though I have written that it might be a good idea, once you really start thinking about it as a business run by the city it gets pretty scary.

Your first example of what might happen is the Park District's golf course. The model at the golf course is you get a bunch of bonds to buy/build it, then you have no real expertise to run it. Oops, a multiple year cluster of silly management decisions occurs. Then your free market competitors start to show up and take some of the cream from the market. Then the market you are in peeks, and total dollars in the space goes down. Finally, you are stuck with a white elephant. Still need to find the fools who voted for that golf course and do something in the blog.

Let's talk about the risks involved with a city takeover -
The biggest risk is that total power needed in the city might go down. As the price of generation goes up, it only make sense that power consumption will go down. People might turn down the heat, sit under a blanket, wear a sweater, install more efficient HVAC, use more efficient light bulbs or even insulate their houses. If power goes up enough, solar electric or wind systems might start to pencil out and we all know that it will be a lot less fun to be in the power business when that happens.

The city will run it poorly. See Hickory Ridge. The first question we should ask as investors is who would be the CEO of the Carbondale Electric Delivery Grid? Unless there was someone involved that we were really sure wouldn't waste the money, why would we invest?

What happens if a tornado hits? One nice thing about being part of a system is that when a big problem hits, qualified repair people pour into the area and make things work again. They have lots of backup parts, here and there, that come too. I would be concerned with my power out after a big wind storm, I could be out for a long time, while the city looks for parts and people to get it working again. The insurance aspect of dealing with a large power company shouldn't be overlooked.

We should have a reasonable fear that the power companies will mess around with the rates of power they deliver to Carbondale. For example, what happens if they decide to charge Carbondale 20% more for power? Could they do this? I think they can, play the lower quantity buyer or distance from plant game. If it is legal, you know they will try. Then you get to buy off more people in Springfield then they do to get the law fixed.

Right now our power company is getting less return on their investment, then Carbondale would pay on bonds. If there was lots of profit in this space, it would make more sense for the city to get into it. Our power company has Billions and Billions of dollars in wire and equipment, they really don't make much on that investment on a percentage basis. Yes, even at the new higher prices. If there was lots of money to be made, someone would be showing up to compete without the city being involved.

I don't think this idea is a good one, too much risk, too little expertise in the city to make this a reasonable bet. The moment that you said you had hired the second in command from Springfield's system and you had a business plan that showed it could work, I would be right back on board though. I don't see how this risk to the city coffers could possibly be worth what the city might get back.

Your comments are welcome.


cynical prof said...

I don't trust any branch of government to run a business efficiently over the long term. Cole's takeover idea struck me as the worst sort of voter pandering and I was prepared to vote against him until I saw Sheila Simon's other ideas are even worse. Now I just may sit out the election.

Peter in Carbondale said...

It is funny, I have written about business over government quite a few times before and in general we know that business is better at this sort of stuff.

Of late the Federal Government has outsourced to business lots of important tasks, like protection in Iraq, support of wounded solders back from Iraq and the like. The companies are way more expensive then using solders and do a much worse job. So if you don't manage the companies, it is possible to do worse.

I'm wondering if Ameren is so poorly managed that you could do a takeover and do well. There are lots of risks and I don't think so, but who knows?