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Utilities and the Government

"We're Here to Help"

Written by Briton Ryle
Posted July 24, 2019

It was pretty hot this past weekend. Temperatures pushed triple digits here in Baltimore. And it didn't drop below 90 until about 11:30 at night. I basically didn't go outside. My AC was cooking, and I knocked out an entire season of Stranger Things

I can only imagine the profanity that emerged from 33,000 Brooklyn households when the cold air stopped blowing on Sunday. (For the record, I'm pretty sure I know how Baltimore would react.)

As it usually happens, summer heat waves put such stress on the grid that something blows. This time, it was transmission cables at Consolidated Edison (NYSE: ED), the power company that serves New York City. One of its 62 substations had 19 cables carrying electricity. Three failed as power demand hit a record of over 12,000 megawatts.

Then the Times reports that two more failed in a 10-minute time span. That's when Con Ed management was forced to make a pretty dramatic move: cut power to a few areas or risk the whole thing going kablooey. 

Governor Cuomo said: “We have been through this situation with Con Ed time and again, and they should have been better prepared — period... They can lose their franchise. We have changed utilities in the past.”

Mayor de Blasio said: “I can’t trust them at this point because I’m not getting any real answers and they have let New Yorkers down once again.”

De Blasio also suggested that maybe it was time for a public agency to replace Con Ed. 

Because power went out in Manhattan the weekend before, too...

We're From the Government, and We're Here to Help 

Ronald Reagan once said these were the nine most dangerous words in the English language. Sure, it's pandering, speaking to the general mistrust of government by the average voter. But when you discover that the Air Force has paid $300 for a hammer, well, it's not just pandering...

But let me ask you: Do you want be on the hook for Con Ed's screw-up? Because that's what would happen if Con Ed were replaced by a public agency. 

I don't know how much the New York government knows about transmitting electricity to 3 million households, but I bet it's not more than what Con Ed knows. After all, Con Ed has been serving that area ever since it was founded by Thomas Edison's less famous brother, Consolidated. (OK, that's not true at all — I just can't resist a good (bad?) joke. Thomas Edison’s Edison Illuminating Company was founded in 1882, more than 50 years after New York's first utility. The name Consolidated Edison came in 1936.)

If New York did decide to take Con Ed's franchise away, wouldn't it make the most sense to keep most of the people on, since they're the ones who know how everything works?

And if you keep the basic structure of the company intact, what really changes? 

I'll tell you what changes: liability. 

Sure, New York would add $13 billion in revenue and $48 billion in assets (for which the state would have to compensate investors). But bringing Con Ed's 15,300 employees onto the state's payroll is gonna push pension liability up. And that pension fund is already underfunded by $12 to $24 billion, depending on which average rate of expected return you use. 

That pension liability falls on the taxpayer, who would almost certainly pay more in taxes if New York takes that business over. 

Con Ed's CEO is John McAvoy. As a state employee, his $3 million salary is not gonna fly. Same with the rest of the executive team. 

The Chartered Monopoly

My guess is both Cuomo and de Blasio are pandering. I seriously doubt they have any desire to take on electricity delivery. Talk about taking over the hated utility company's business, and they'll curry some favor with voters. Actually do it, and they'll hate you when the AC goes off. 

But the whole thing does raise some interesting questions about basic services, free markets, and governments. Utilities also require massive investment. So the government gives utility companies a monopoly to guarantee the company can recoup its investment. But since the companies have monopolies, the government also regulates their pricing to ensure consumers don't get gouged.

Because it's not a free market, there is no competition to keep prices balanced. 

Breaking up AT&T got us high-speed internet and cable. Deregulating utilities got us Enron. 

Personally, I can see the argument for having utilities be run by state governments. I mean, utilities, they're gonna be somewhat inefficient because there's little innovation going on there. That $3 million salary seems to be a little out of whack. And does that $1.3 billion in net profit really make sense for a basic service like electricity? 

I'd put HMOs in the same boat. Should that company book $3 billion in net profit and pay the CEO $6.25 million a year to rubber-stamp forms and dole out my insurance money? I say that's horrible and represents a quasi-monopoly that is wholly unregulated. 

And how's that free market for health care turning out? Are costs falling because of all the competition? Ha! Like I said, I can't resist a good joke.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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