In the earlier articles of this series, we considered some problems with the conventional approach of billing for electric power. We call that approach delivery-billing because customers are simply charged a fixed fee for each KWH of power delivered to them. Electricity bills often include a line item for the electric power along with a separate line item for the delivery of that power; to customers this may seem a curious distinction; the electricity becomes useful only when it is delivered and both line items must be paid. But the rational for making this distinction is that one company (or perhaps several) produces the energy, but it is a single but often separate company (the one we call the power company) that delivers that power and sends us our monthly bills. Charging by KWH for the power, at least when generated using fossil fuels, is hard to argue with. But no matter how the power is generated, charging for delivery of each KWH is a mistake with potentially harmful consequences. The basic problem is that the actual delivery costs for the power company are largely unrelated the amount billed.
In this article we illustrate the problems this disconnect can cause, with a story about the hypothetical Hypyer Widget Company, a wholly owned subsidiary of the Hypyer Corporation.
Projections for a rapid growth in demand for the Hypyer Corporation's widgets led its CEO to send a memo to its vice-presidents and directors soliciting business plans for an additional widget factory. The RFP noted that while electric power represents a significant cost for the existing widget factory, a yet larger expense has been from the frequent drop in productivity caused by excessive employee turnover. The proposal submitted by Vice-president Quipwhit was selected and Quipwhit was authorized to carry out the plan and manage the new factory. Certain that this would prove more palatable than attending boring meetings all day as in his present assignment, Quipwhit was delighted. This project would likely keep him busy until he could retire.
Dinwhit was the name Quipwhit had inherited from his father but in his early 20s, he had changed his surname. The change was no doubt motivated in some deep way by recollections of ribbing he had suffered in early school days, but his young adult mind justified the name change based on appearances. No longer did anyone openly rib him about his name, but he still worried what people might be thinking.
After some investigation, Quipwhit located five promising sites for his factory, scattered around the sunny southwest. His search had been for large plots of inexpensive undeveloped land that fell within the geographical bounds of medium-sized towns with depressed economies. These sites should also be reasonably close to highways or rail lines. Quipwhit, wanting the towns to be fully aware they were in a competition, made it no secret that he was soliciting proposals from several different towns.
What Quipwhit was offering was a factory that would bring more than a thousand jobs to the town he selected. Of course, he did not mention that these jobs would, with very few exceptions, surely pay only the minimum wage. What he asked in return was for the selected town to build a sturdy road for trucks and to exempt the Widget factory from property taxes for a dozen years. He also wanted guarantees that the power company would provide, at minimal expense to the Widget Factory, 20,000-amp. service. The proposal explained that the factory would operate for ten hours a day and would draw, during those ten hours, roughly 12,000 amps. An extra 8000 amps would add a margin for error, but the proposal failed to mention that would also ensure electric power for some additional buildings.
The local power companies quickly estimated that they would be delivering 14400 KWH of power each day for 30 days each month, a total of 432,000 KWH each month. At the current delivery rates of around $.25 per KWH, this would give them an additional income of $108,000 per month. The cost of establishing the requested service level was only slightly over a million. For these small local power companies, a million-dollar investment was a big commitment, but for the anticipated returns, it seemed easily justified; the more difficult issues would concern the road construction and the tax waivers.
Four of the five towns rejected one or more of these terms, but one town named Maeket had a strong mayor, ironically with the name, Dinwhit, who especially wanted that widget factory. Maeket was a deeply conservative town with faith in a unitary executive. So, such a decision was up to Dinwhit to make.
Quipwhit was curious about whether he was in some way related to the mayor, but he dismissed any thought of investigating that possibility. The town itself, back in the 1950s and into the 1970s, had thrived, thanks to an assortment of mysterious local businesses that were engaged in secret military consulting. But that prosperity had withered in the 1970s and finally vanished by the 1990s. Maeket still had nearly 10,000 residents, but the town had vanishingly little income. Its dwindling and aging population consisted mostly of retirees with ample savings. These people had made good money during the years of prosperity and they were now living on that savings and Social Security; there were younger people who looked after them and a few small retail businesses struggled on, but the town was living only on the limited and now withering wealth from earlier days.
It greatly annoyed the mayor to hear people say that you just can't make it in Maeket. He had grown up there and dearly hoped to find a way to turn its economy around. His dream was to hear them say, you really can make it in Maeket.
The proposed factory would be eight miles from town center. To build a road to tolerate the expected heavy truck traffic would cost an estimated $1.5 million. But new jobs for a thousand people sure sounded so attractive to Dinwhit. He salivated at the prospect that this would surely bring new people to town who would buy houses and spend money.
Dinwhit found that Maeket could issue 20-year municipal bonds at about 5% interest making the cost to the town to be only about $9900 a month to pay for the road. That's only about $10 per month for each resident, Dinwhit thought. Foolishly (as he learned later), he offered the widget factory everything they asked for and Mayor Dinwhit was thrilled to learn that the new widget factory was to be built in his town. Hypyer Corp. was nearly as thrilled to draw up the contracts.
Before assuring Mayor Dinwhit of the decision, Hypyer Corporation (then identified only as a Mr. Smith) purchased nearly 300 acres of land that was then mostly regarded as worthless. The attorney, Mr. Smith, went before the Maeket planning board to get approval an enormous apartment complex and general store out in that wilderness outside of Maeket and no roads; the board was mystified at the seemingly crazy; but Mr. Smith was paying substantial fees, and so they granted approval for the project. There seemed no real harm in this very odd proposal and in any event, they suspected that none of this would ever happen.
There was some bad blood between Mayor Dinwhit and the Maeket Planning Board, so the board was not yet aware of the Hypyer Corporation or the proposed factory. As much as anything, this probably accounted for the deal going through as smoothly as Quipwhit had hoped and even that was much more smoothly than he had reason to expect. When the plan for the road project was finalized, it included an interchange connecting with the interstate that was only a mile from the proposed widget factory. The town chose to avoid having big trucks going through the center of town, and this was also an advantage for the factory. This made the road project a bit more costly, however, so the impact on taxes would increase. But the power company promised that their projected income from the new factory would result in reduced electric bills for people and businesses in the town.
When completed a year later, the general store and the apartment complex not only had a connecting roadway but attractive walking and biking paths. There was also a well-groomed path to a particularly scenic spot that was destined to eventually include several picnic tables and some playground equipment for young children.
These conveniences were implemented, not because Quipwhit was a particularly progressive thinker. He might better be described as a woke conservative, wakened from his executive slumber by a sudden concern, not so much for the workers but rather out of concern for worker turnover. Aware of the unpleasantness of life for a minimum wage worker, that seemed a likely cause for much of the costly turnover experienced at the existing Hypyer widget factory.
Still, Quipwhit understood that Hypyer Corporation would surely reject any proposal for paying ordinary workers more than the minimum wage; proposing that seemed to risk an emotional quagmire. But he gambled, correctly as it turned out, that the company would find more acceptable some other expenditures to make the lives of his workers easier. That approach might even make workers more productive, but that thought did not make it explicitly into his business plan. Controlling worker turnover was his rationale for the apartment complex, which would rent to workers at cost; the general store likewise would not be expected to turn a profit. These facilities might even be allowed to operate at some loss if that would keep worker turnover under control.
To avoid the need for workers to own an automobile, electric shuttles would run frequently between the buildings and, occasionally, even to the center of town. There were trails for biking and walking. Playground equipment and some indoor space was included in the plans to provide places for workers' children to play and for adults to socialize. All in all, the effort was not to make life luxurious, but at least comfortable for workers. If life was even a bit better than they could expect elsewhere, that should damp down the frequent turnover. That was his thinking, and it worked marvelously; as word about the conditions there, the widget factory easily found workers and those workers rarely quit.
The factory operated at capacity for ten hours a day with workers filling a mix of four-, five- and six-hour shifts. To the extent possible, workers' schedules were adjusted to meet workers' requests. Many workers considered the regular schedules, together with these accommodations, as important benefits, appreciated just as much as the low prices at the general store or the shuttles and trails.
Many workers traveled by bicycle, some foot-powered but a few, electric powered. But even the avid bikers took advantage of the shuttles when it came to shopping at the general store or in down-town Maeket. But soon, town merchants complained about it being so rare for factory workers to buy more than a little fast food from town merchants. However, the town merchants were particularly angry that so many town residents had stopped shopping in town but instead at the Widget General Store.
Quipwhit had not anticipated this problem, but being sensitive to these complaints, he decided to introduce a credit card to allow workers to charge their purchases at the company store. These charges would be discounted and then deducted from future paychecks. Town folk went back to shopping in town where it was more convenient. And for workers, the General Store still operated at or below cost, still helping to provide a dependable workforce for the widget factory. The fact that town residents no longer frequented the general store reduced operating expenses for the general store and this allowed an increase in the discount for workers (and managers) who paid with the company charge card.
While town merchants were pleased to notice that their former business activity was returning, they still grumbled at how much their taxes had increased. The mayor pointed out that they did see a nice drop in their electric bills, but the town merchants still felt cheated that they had not profited from extra business from the widget workforce as they had expected. But at least they were no longer losing long-time customers to the Widget General Store.
Before the first year of operation ended, solar panels appeared on top of factory and apartment buildings, and this gave workers access to reduced cost electric power. Some other solar panels were located to shade playground and picnic areas near the apartments. The General store no longer drew quite as much electric power from the grid so there was a small but noticeable dent in the factory's grid-power consumption; so, there was added pressure for electric bills in town to be increased. The factory's fleet of electric shuttles could now be fueled by solar power. Before long the company stopped bothering to charge workers who could show their charge-cards for rides on the shuttles; the occasional rider who lived in town still paid a small toll. In each subsequent year, more panels were installed, mostly now on open ground and each year the amount of power drawn from the grid fell.
In time, as more and more solar panels were installed, the widget factory even began selling electric power, but still, the factory would depend on the local power company. There were occasional cloudy days and, depending on the time of year, some production time when it was dark. The 20,000-amp service was valuable to the widget factory, though now mostly for these occasional and usually brief times. And while the widget factory continued to pay for that electric power from the grid, this provided insufficient income for the power company. Providing electric service to the factory remained every bit as large an expense for the power company than it had ever been, but with reduced consumption that provided them precious little income. That income did not even pay the interest charges on the power company's loan for establishing that service ten years earlier.
The power company could not even take pleasure in complaining to Quipwhit for having misled them. Quipwhit had already moved to Maui for a comfortable retirement on that beautiful island. The power company had no alternative to increasing power delivery rates for all customers; the unanticipated drop in income from the widget factory had to be compensated by increasing bills, mostly for other customers in Maeket. Ultimately, Maeket had not gained much by the factory coming to town; the town folk were now paying both more in taxes and more for electric power. They did now have a second easy access to the interstate, however.
Electric bills were higher, despite the fact that power-generation costs had fallen significantly over the last decade. During these years, the power company had increased its delivery charges enough that most customers had seen their electric bills steadily increase; delivery of the power had become more costly than the power itself. But these increases barely affected the widget factory, which now paid delivery charges of under $10,000 a month. The people in town, most of whom remained dependent on the grid, simply had to pick up the difference in increased delivery-billing charges.
The people in town were angry about the increases in their electric bills on top of the increases in their taxes. They blamed Mayor Dinwhit (now finding his name often derisively mispronounced) and his two successors for the problem but there was not much any of them could do. Hypyer Corporate lawyers had been sure to make that very clear in the contracts they had drawn up that the Widget factory, apartment complex and general store remained exempt from property taxes. Some town residents were themselves installing solar panels, but this only put yet more upward pressure on the KWH delivery charges for other residents of the town.
The power company also had a new CEO, the former one having been pressured to resign a year or two earlier. At the suggestion of a young employee who had picked up the idea on the internet, the new power company CEO petitioned the Public Utilities Commission to change the power company's billing from delivery-billing to service-billing. This did not affect the now lower charges for electric-power generation, but the charges for delivery of that power would no longer be computed based on a fixed price for each KWH of power delivered. Instead, that line item would apportion the operation expenses of the power company in proportion to the costs for providing a customer's level of service. In the case of the widget factory this made a dramatic difference. It seems that Quipwhit, who had never anticipated such a turn of events, had retired just in the nick of time, but still he would be fondly remembered and at times emulated for his solution to the turnover problem.
A significant portion of the power company's operations were for servicing the large bank loan they had taken out to install service to the widget factory, but that was far from the only expense. There were also maintenance expenses, worker pay, office equipment and the like. The power company determined that charging the widget factory $85,000 a month for providing its 20,000-amp service in a rural area was appropriate. But certainly, the cost of the loan played some role in the decisions about what constituted the widget factory's fair share of costs. $85,000 was well below the revenue that the power company had projected a decade earlier and it was even less than the power company was billed during the first three years the factory was in operation but even so, it was more than sufficient to cover the interest on the loan and at least pay for the anticipated maintenance of providing service to the factory.
The new billing approach had led the PUC to conduct more thorough audits and those audits led to a bit of belt tightening at the power company. Overall, charges to customers had fallen some. Both town customers and the widget factory had to share in the power company's costs and profits. But for homes in town with 100-amp service, average monthly service charges dropped to rarely more than they had paid using delivery-billing ten years earlier. Many homes in town were older and still had only 60-amp service so their bills were 40% lower than for the similarly situated homes with 100-amp service and in most cases, this was significantly less than they had paid ten years earlier. The power company noticed a gradual increase in power consumption, probably because people began to realize that their electric bills did not increase as much when they used more electric power.
Mostly, people in town blamed the former mayor and the power company more than they blamed the widget factory for all the increased bills they had been forced to pay. But there was some consolation in realizing that in just a couple years the town could start taxing the widget factory properties. Maybe then, some of the town services that had been eliminated over the last decade could finally be restored. Perhaps the town could again have a professional fire department.
