Atomic power: has it outgrown its regulated utilities?
It's the sort of debate George Bernard Shaw would have loved: heated, symbolic, and complex. Local in detail, it concerns issues of national significance. It is the debate over nuclear power and the future of regulated utilities--heard across the country, but nowhere more clearly than in Boston.
On one side is Boston Edison Company, the investor-owned public utility supplying electricity to 1.5 million people in Boston and 39 surrounding communities.
On the other side is an assortment of its customers, represented by such advocacy organizations as the Massachusetts Public Interest Research Group (MassPIRG).
In the middle is last September's decision by Edison to scrap its plans to build the Pilgrim II, a companion to the Pilgrim I nuclear power generating station now operating in Plymouth, Mass.
And on the table is a controversial April 30 decision by the state's Department of Public Utilities (DPU), letting Edison charge customers for the $ 291 million loss it incurred in planning the canceled plant.
Shaw would have especially loved the fact that the arguments on both sides are apparently irrefutable--until you hear the counterarguments:
* Consumer groups insist that customers should not have to pay for something that has never benefited them in the slightest and will produce no future benefits.
* Edison officials counter that they were trying to guarantee future supply and lower electricity rates. They argue that unless they are allowed to collect lost funds, they will face financial difficulties so severe as to jeopardize their survival.
* But consumer groups respond with an analogy. Ford Motor Company, they note--which, like Edison, is owned by stockholders--was not rewarded by its customers for building the Edsel. The loss had to be borne by those who owned Ford shares.
* Yes, say Edison officials. But when Ford built the Mustang, they sold it at market prices--and kept every cent of the profit. But the price of electricity is tightly regulated. If you want us to swallow our Edsels, say Edison officials, then let us make everything we can on our Mustangs.
Who's right? Is Edison inept, careless, and greedy? Or are the customers ignorant, shortsighted, and antibusiness?
Does the problem lie in the regulatory agencies? Or is the debate simply a pretext for venting a hatred of nuclear power?
Is the nation's regulatory system a kind of compromise whose contradictions are inevitable? Or is there a fundamental misconception that, if remedied, could set the whole process on a stronger footing?
These are some of the questions facing MassPIRG's Charlie Donaldson. From his cluttered office on Boylston Street, he has been following the issue from a consumer-oriented and antinuclear perspective.
He does not like what he sees. ''The company,'' he says simply, ''made out like a bandit.'' Plugging in his calculator, he whittles away at Edison's $291 million figure. First, he subtracts $12.7 million worth of stockpiled nuclear fuel, which Edison has already sold. From the remaining $278.3 million, he next subtracts $116 million, which he says will be recoverable as a tax loss. The resulting $162.3 million, however, includes about $70 million already spent for a nuclear steam supply system and a turbine generator. If sold--which Edison officials say would now be difficult, given the number of nuclear plant cancellations--they would bring the out-of-pocket costs down to $92.3 million.
Next he also notes that the DPU, in its recent decision, allowed Edison to add $12.7 million a year to its rates for 13 years to pay for Pilgrim II--a grand total of $165.1 million. He also notes that in order to net that amount, Edison will have to increase the $165 million figure by nearly half, to allow for taxes.
So the total bill to the consumer, Mr. Donaldson says, will amount to $305.7 million. All that, he says, is to cover costs of less than $100 million--which he says Edison stockholders, with 1981 retained earnings of $152 million, could well swallow.
From MassPIRG's viewpoint, the underlying charge against Edison is one of mismanagement. Mr. Donaldson, who sees a pattern of imprudence, notes that Edison was recently told to refund to its customers $6.27 million in fuel adjustment charges which it passed along during a period when Pilgrim I was shut down for 27 weeks. That shutdown, the DPU ruled, should have been far shorter. Earlier, the US Nuclear Regulatory Commission fined Edison $500,000 - the largest fine ever assessed against a United States utility - for safety-related violations at Pilgrim I.
Is there a pattern of mismanagement? From his office high in the Prudential Tower, Edison vice-president John Stevens disputes that charge. He cites evidence from two recent ''management audits'' by outside firms, in which he says the company came out ''pretty well.'' He agrees that ''it probably would have been prudent from our perspective to cancel (Pilgrim II) a little earlier.'' But it would not have been so from the customer's perspective. The reason: Electricity from Pilgrim I costs only 1.5 cents per kilowatt-hour, compared with a typical nonnuclear price of 4 cents. Pilgrim II was intended to continue that downward trend in rates.
Through most of the 10-year planning process, Mr. Stevens says, financial projections showed the plant operating profitably the moment it went on line. Only in 1981, with inflation and high interest rates, did the projections finally show a five- or six-year lag before profitability.
What really killed Pilgrim II, he says, was the delay - partly due to the public outcry after the March 1978 problem at Three Mile Island. By September of 1979, the DPU had collected some 20,000 pages of testimony on Pilgrim II. But it did not render a judgment until Sept. 22, 1981. It was a favorable one. But Edison had already decided to abandon the project. ''If somebody is imprudent and incompetent,'' Mr. Stevens says, ''I would suggest it is the people who took two years to make a decision.''
One of those people is Jon Bonsall, chairman of the DPU. Sipping a can of Tab in his corner office at the state's Saltonstall Building, he notes that part of the reason for the delay is simply the small size of his staff.
He sees the consumers' side. But ''short-term solutions create long-term problems,'' he says. How far should the rates be pushed up to cover lost investments? ''Most consumers would argue that zero is in their best interest at this time,'' he says. But the company, he says, must be allowed to finance its way toward future reliability. Some of that, he says, must come out of the stockholders' profits. But some must come from rates.
Decisions nationwide to allow utilities to recover costs from consumers are common, says Daniel Gardiner, who follows utility stocks for the New York office of the stockbroking firm of Blyth Eastman Paine Webber Inc. Otherwise, he says, companies might miss paying dividends. That happened in 1974 to Consolidated Edison, the New York utility. Not only did Con Ed stock fall from $46 to $6 a share, but utility stocks nationwide plunged 40 percent in the next six months. A financial failure in Boston would have similar repercussions.
All of this, as Harvard researcher Peter Navarro writes in the latest Harvard Business Review, puts the utility industry into a dilemma. On the one hand, capital spending is needed to guarantee future supply and to lower the rates for consumers. But in their highly regulated environment, utilities tend instead to practice ''capital minimization'' - taking as few risks as possible in order to protect their stockholders.
Is there a way out of this tangled web? Utilities, by their very nature, are monopolies: Our streets are not wide enough nor our pockets deep enough to allow competing companies to set up duplicate poles and lines. They produce an indispensable service, but are not regulated by the marketplace. So regulation is essential.
Yet perhaps the problem arises from a philosophical inconsistency. Are the regulators attempting to regulate vast areas of activity that are not inherently monopolistic? Admittedly, the distribution of electricity requires a monopoly. But does its generation? Imagine Boston Edison as nothing but a distributor - purchasing electricity at the best price it could find from independent suppliers. Could not such a distributor, in fact, also contract out its repair services, its fleet maintenance, its billing operations, even its personnel services - none of which are inherently monopolistic? That might or might not reduce overhead. But it would leave to the regulators only the thing really needing regulation - the distribution of power.
That, of course, is not the way things are. And getting from here to there may be impossibly difficult. But if the analysis is correct - if there is a flaw in our conception of what a monopoly is - we should not be surprised that the regulation process is so tangled. It is something Shaw knew well: that until we rethink our premises, we will pay the consequences of our misconceptions.