Leonard Hyman and William Tilles:
Why do electric companies spend so much on new plants when consumers show so little inclination to buy more of the output?
From 2000 to the present, investor-owned utilities doubled their equity base while kilowatt-hour sales rose less than 10%. The more they invest, the more they can earn, so they have an incentive to invest when regulators allow them to earn more than the cost of capital.
If sales do not increase, how will they earn additional profits to cover the cost of the new investment? They can cut costs or raise prices, of course. They have cut costs for two decades. Now it looks as if they will have to raise prices, working through the slow state-regulatory process.
They might have to raise prices for a kilowatt-hour just as the introduction of disruptive technologies might give consumers an alternative to the legacy electricity provider. That’s the death spiral: Utilities raise prices, making an easier entry for competitive products, then utilities lose sales and must raise prices more to pay for all of the overhead they installed unnecessarily, and competitors take still more of the market.
That brings up the electric company’s peculiar relationship with its customers. Electricity consumers do not line up the night before to buy power. They have no thoughts about the electric company while the lights are on and only the worst thoughts when the lights go out. They may stick to the local utility’s electricity retailer—but largely out of inertia, or because they never heard of the competitors, or they don’t believe any action offers anything worth the effort of switching.