Utilities and their Impact on the Rich and Poor

When I first started with the industry, I was on a plane going to Iowa. Next to me was a young kid and his mother. We got to talking and I said I was doing some work for the power company. And his comment was "are you the man that comes and turns off the power!?". His mom was a bit embarrassed obviously and this kind of dented small talk but it is something that has stuck with me for a long time - this is how a lot of the world, and especially poorer people, view the power company - as an evil company that is constantly demanding money just for a critical service that they can't do without.

There is some truth to this argument. Utility costs are very regressive in that everyone pays the same cost, with a minor differential based on usage. For a rich person, having an electrical bill of 100 dollars is a drop in the bucket; for someone making near the minimum wage that represents a substantial outlay. To make this problem even worse, states and municipalities "tack on" additional taxes - my electric and gas bills in Chicago average about 15% in additional state and local taxes, and this doesn't even include the property taxes embedded in the utility rates.

Here is an excellent link to an article by a stand-up guy named Wayne Leonard. He is the CEO of Entergy, a utility that serves Louisiana and parts of the rural south, some of the poorest places in the country. Wayne Leonard used to work at Cinergy and I met him when I did some consulting there - he started in their plant accounting department and rose through the ranks. He is widely recognized as one of the smartest people in the industry.

Why does this matter? Well here is a question for you. Go to the poorest area of town. I am talking about a very impoverished area like we have in the urban areas of Chicago or Detroit. Look around. You might not even see a gas station or retailers of any sort.

But they all have power...

Due to the universal service requirement, utilities provide power to everyone in their service territories. Think about that. If the utility didn't HAVE to provide power to these individuals, they would probably immediately abandon that part of town, if they were motivated solely by the bottom line and shareholder returns. From a financial perspective, they would probably pay someone to take these service territories off their hands (i.e. here is $10mm and now you can serve the blighted portions of Detriot. Enjoy).

Poor people are expensive. They require deposits and constant turning on and off of power. They pay late, and make partial payments. The staff that serves that area often have to travel in pairs, and they may not feel safe at night.

It is very important to realize this because the three elements are hand in hand 1) monopoly service territory 2) universal service 3) regulated rates. As soon as people talk about utility "de-regulation" it is a short path to unraveling the universal service requirement, as well.