Friday, September 6, 2013

Duke Power Makes a $1 Billion Mistake in Florida – Cost to Shareholders is Zero

Just Stick It to the Customers – That’s the Law in Florida

The genius of the economic system of private markets is that the best possible allocation of investments should take place.  Because private companies are owned by private investors, the decision to invest in a particular project will be done mostly (no, not always) on its merits, and not on political considerations or other non-financial basis. 

The best potential projects get funded, the projects that are not financially desirable do not.  And if the company makes bad decisions, the shareholders suffer the consequences as well they should since they are the party responsible for installing management.  All in all about the best system anyone has come up with so far.

But of course shareholders and management don’t want that system, they want a system in which they are lavishly rewarded for success and not punished for failure.  Such a system violates the basic principles of capitalism, but if it can be achieved, who cares?  And such a system exists in Florida and a few other so called conservative states where a public utility can bill customers for failed projects.

The decision by Duke Energy (DUK) to scuttle a proposed nuclear reactor project in central Florida leaves utility customers in the state with a tab of more than $1 billion—most of it already paid to Duke—for unbuilt plants that may never produce a single kilowatt of energy.

What happened was that Progress Energy, recently acquired by Duke Power collected the money from rate payers to start work on a nuclear power plant.  Then they stopped the work, but of course get to keep the money.  And yes, it’s all legal in Florida.

Lawmakers in at least three states have allowed utilities to recoup their engineering and planning costs from customers years before any construction begins on new plants. Florida legislators passed the first such law in 2006, followed by Georgia and South Carolina. A lawsuit over the Florida measure went to the state Supreme Court, which ruled it constitutional. Multiple efforts to repeal the law have failed.

The problem with this is that it insulates management and shareholders from the impact of bad decisions, and hence provides no incentive not to make bad decisions.  After all, if someone else is paying for management/shareholder mistakes, who cares how much money they waste.

Now if conservatives really supported capitalism instead of its current replacement, crony capitalism (also known as socialism capitalism) this sort of thing would not happen.  But then if pigs could fly . . .

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