When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders?

So who takes the risks, and who gets paid to take them?

By Leonard Hyman and Bill Tilles:

In the UK, the government puts its various rail franchises up for public bidding periodically. Rather sophisticated corporate bidders calculate projections for rail traffic, expenses, ticket prices and the like. And based on their financial assessment offer a series of payments to the government in return for the train franchise.

This week, the two operators of the London-Newcastle-Edinburgh train line, Virgin Group and Stagecoach, announced the line was likely to be operating at a loss in the next two years. Revenues and, far more importantly, profits were not remotely going to meet expectations.

These two operators of the East Coast line effectively went to the government’s Transportation Secretary Chris Grayling and said, “Here, you can have your franchise back. Oh and we won’t pay you the £3 billion we said we would two years ago. We messed up in our sums.”

And of course the Tory government — rigid disciples of Thatcher and F. A. Hayek replied, “Bust a deal, face the wheel.” Or the stern British ministerial equivalent thereof.

Not really. What they received was not even a half-hearted, meek reminder that corporations with stockholders should realize they assume certain business risks in return for what they expected to be adequate levels of recompense. And the fact that these anticipated profits have now proven illusory does not make this the government’s problem until the franchise agreement expiry in 2022.

Or, standing on the strength of their contract agreement the government’s ministers might’ve politely reminded the unhappy rail franchisees that in the harsh language of the elementary school playground, “Sorry, no backsies.” Which is merely an eight year old’s way of saying, “See you in court.”

But what happens when rosy business scenarios fail to materialize for large, politically well-connected privately owned corporations? Nowadays in the UK, the transport secretary lets you off the hook. Risk and reward apparently means, shareholders take the rewards, government takes the risk.

Or to borrow again from the playground, being a privately owned corporation in today’s UK means getting lots of “Do overs” from a lenient government bureaucracy.

Another government approved multi-billion dollar mess takes us to South Carolina and the SCANA-Santee Cooper nuclear fiasco. Starting around 2007, SCANA embarked on an ambitious two-unit nuclear construction project. As we’ve seen since the plant’s July cancellation, completion of this project was apparently beyond SCANA’s (and Santee Cooper’s) financial and managerial capabilities.

The project failed due to relentless cost over-runs which ultimately led to the bankruptcy of the builder, Westinghouse. SCANA’s stock fell in response. But Virginia-based Dominion Energy just offered to buy SCANA in a move that would, if little else, mitigate a considerable portion of shareholder pain. Let’s look at the deal.

SCANA has already written off a part of the project. In that respect, one might argue that shareholders have already taken a hit. Except that was on the books, not in reality. Dominion is offering SCANA’s shareholders an amount equal to what their stock was worth before the cancellation of the nuclear project. SCANA shareholders may emerge from this nuclear construction debacle almost unscathed. Bondholders will collect interest and principal on schedule too.

Borrowing a concept from physics, we believe that capital, like matter, is at times almost impossible to destroy. There are infinite ways to reallocate it. But destroying it is another matter. But that’s what South Carolina’s Governor and some legislators are insisting on – that none of the cancelled nuclear plant costs will be borne by customers. They promise to free the electricity consumers from the economic burdens associated with their recently cancelled nuclear plant.

These financial burdens come in two bundles. The equity, or shares of stock, SCANA’s management sold publicly to finance nuclear construction and the bonds they sold to fixed income investors for the same purpose. It is the obligation to bondholders that concerns us here. That obligation under the proposed merger transaction is merely transferred from SCANA to Dominion.

Under this proposal, South Carolina’s electricity users continue to pay an additional $20 per month for 20 years. Dominion Resources has proposed to take those funds and retire the debt (i.e. bonds) that was originally incurred to finance the now cancelled nukes. In other words, South Carolina’s electricity consumers ultimately (even if unwittingly) incurred a portion of the financial risks and they are being asked to continue to pay for past mistakes. For which investment of course they will receive no electricity.

We are not arguing that it is good policy to let public service enterprises mismanage themselves into insolvency. Nor are we suggesting completion of the VC Summer nuclear units would have been the preferred course. The public loses as well as shareholders and creditors. But despite whatever capitalist or free market trappings are on display, the US federal government does on occasion bail out private institutions like banks, aerospace, automotive companies, and the old days even a railroad like Penn Central.

When this occurs, the government and ultimately the public effectively becomes the financial risk taker albeit implicitly. But in finance theory that is what shareholders are supposed to do. And the public frequently receives a far smaller return than shareholders for what turns out to be the equivalent financial risk.

Let’s go one step further. We can segment the electricity business by risk: the high risk commodity power suppliers and the low risk distribution or wires business. Maybe consumers would not want to directly take on the risks of the power producers, but what about the supposedly safe wires?

If the government will bail out any wires company (because we want to make sure that the company continues to provide a vital service), then do those companies need stockholders?  Could a government-owned utility accomplish the same task at a substantially lower cost of capital? Darwinism may lead to good decision making, but not when the predator is leashed. By Leonard Hyman and Bill Tilles.

The Fed is in search of the elusive soft landing, but it might not find it. Read…  Markets Still Blow Off the Fed, Dudley Gets Nervous, Fires Warning Shot

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  62 comments for “When Profits at Utilities are Privatized and Losses Socialized, Do We Still Need Public Shareholders?

  1. raxadian
    Jan 13, 2018 at 12:44 pm

    And of course no one is gonna sue them.

  2. Maximus Minimus
    Jan 13, 2018 at 1:37 pm

    It’s difficult to have capitalism without moral, and it’s difficult to have morals with capitalism.

    • Javert Chip
      Jan 13, 2018 at 6:15 pm

      MM

      I’ll leave you and the Pope to figure out “…morals …capitalism; capitalism…morals), but you sure can’t have capitalism without consequences (profits and bankruptcy are the two polar-opposite end-points of the capitalist spectrum).

      It’s fantasy to think there can be a system with no down-side risk – this applies to communism, socialism, capitalism and any other “-ism”you care to dream up. Venezuela is a good example of only being able to sweep so much under the rug before the entire system crashes.

      • Jan 18, 2018 at 4:08 am

        Venezuela like every US economic target is being helped in their struggles by US imposed economic sanctions.

    • alex in san jose AKA digital Detroit
      Jan 14, 2018 at 5:23 pm

      Capitalism is amoral. This is intrinsic. Ideally, by each individual looking out for themselves, doing what they think will benefit them the most (growing potatoes on the fertile land they have, building wagon wheels because they have a knack for it, being the town’s moneylender because you have good judgement etc.) all benefit. The whole thing is propelled by self-interest. This is Adam Smith’s argument for capitalism.

      Marx, on the other hand, discusses fully developed post Industrial Revolution capitalism and what happens, unlike in Adam Smith’s small communities, but in industrial economies. Offshoring. The “surplus army of the unemployed”. Industry leaders conspiring to keep workers’ wages low. The fact that under capitalism, if you can’t work, you’re worthless and it’s most efficient to let you die.

      So there’s much to discuss about capitalism, but morals are a parallel system the capitalists have not found a way to get rid of yet, and are no part of capitalism.

      • c smith
        Jan 15, 2018 at 12:33 pm

        Yet, it is under capitalism that ultimately the greatest “social” progress is made. A society with limited or no resources (due to the lack of individual incentive to produce) cannot AFFORD good works. And, assuming there will be some political structure overlaid on EVERY economy (whether capitalist or socialist), history shows even a nominally socialist”economy” falls victim to the power and influence of the elite. They just have less to work with.

      • RagnarD
        Jan 18, 2018 at 6:27 am

        Alex
        So you think the people have suffered under capitalism this past century?

        Oh my.

        Please consult your history books for the full account of the deaths at the hands of those attempting to achieve economic justice ala Karl Marx.

        Here’s a guide: USSR, Red China, Cambodia, Vietnam, lots of post colonial African states, Venezuela, etc.

        States that wouldn’t / couldn’t allow their people to suffer the competition and pressures of FREE MARKET capitalism.

        Note how the people fared.

        Note how they were faring at the exact same time in the most capitalist places on earth.

        Where would you cast your lot?

        • d
          Jan 18, 2018 at 9:17 pm

          Try basic Democracy Not Capitalism. as your divider.

          As the west becomes less truly Democratic (America is not a Democracy any more it is a corporate owned Duopoly) So the little peopel start to suffer more like those who live in the communist socialist Dictatorships or strongman Dictatorships that pretend to be Democracies. Russia china iran Etc. Going down the list to the worst in Africa and south America.

          The only sort of Capitalism that flourishes in non Democratic states, is Crony/Mafia Capitalism with Political approval.

    • raxadian
      Jan 15, 2018 at 5:54 am

      This is not morals, is outright lawbreaking. The Robber barons are back.

  3. andy
    Jan 13, 2018 at 1:54 pm

    I say dont pay, cut the cord, get your electricity elsewhere.

    • William Smith
      Jan 13, 2018 at 5:29 pm

      In Australia with the massive and constant increases in electricity prices over the past decade, this is exactly what most people are now thinking about. As the cost of solar panels tumbles, the average cost for panels and wiring is AUD2000 (as opposed to ~AUD7000 a few years ago). However batteries are another matter at AUD17000. This is where the likes of Tesla might have the biggest impact. As the exponential increase in economic rent imposed by the (privatized) power companies becomes blatantly obvious, it is clear that “cutting” the chord is the only way that the average household has of avoiding being raped by these Darwinian monsters of capitalism.

      All we are waiting for is some new battery technology; and there are many exciting technologies being developed as we speak. Tesla’s “Power Wall” is a good first step, but still unfortunately degrades over time (as the batteries in your laptop do). “Cutting the chord” is becoming a catch cry to try to reclaim back some control. It started with cable TV and is moving on to electricity and the Internet.

      As certain types such as the wonderful Agit Pai try to increase the stranglehold of the corporates, there is now a grass roots movement to create private and localized Internet access using new emerging WiFi router technology to bypass the incumbents (cutting the AT&T chord). There is even a localized mesh network for smartphones being developed which bypasses the telcos.

      It is quite clear in all of the western world that the governments have broken their sacred covenant with their constituents to provide an equal and affordable environment in which all businesses, not just the mega corporations can thrive. By “privatizing” essential services (water, electricity, telecoms, trains) they are imposing unwarranted and unfair economic rent on the vast majority of the population/voters/businesses.

      This is why the likes of Trump are sorely needed because he is finally shining a spotlight on the theater of the absurd that modern “government” has become. All major parties of every (so called) “democracy” have been bought and paid for for a long time. We have the “best democracy money can buy”. So the only hope is for independent outsiders to be voted in and to shake things up and “cut the chord” of the old corrupt/bought despots. Everyone has his price, but for the likes of Trump, that price would (hopefully) be so high that even the mega corporates can’t afford it. (we can live in hope)

      • Alfred (Melbourne)
        Jan 14, 2018 at 3:09 am

        “All we are waiting for is some new battery technology”

        Don’t hold your breath!

        The last big thing was the Lithium-ion battery and it was invented over 30 years ago. Since then, lots of promises but nothing substantial.

        BTW, pretty well all possible combinations of the periodic table have been tried.

      • Tom Pfotzer
        Jan 16, 2018 at 6:23 am

        Amen, right brother(s) William and Andy above. Let that lovely ethos of economic darwinism extend all the way out to the leaves of the tree, where I live.

        I spend a lot of time building the tools that those little-guy niche-builders need in order to do their darwin-izing, and I commend all others that do the same.

        A caution to William: Trump is not “busting” anything. He’s not redressing any injustices. Trump is simply brokering new deals, each of which he gets a piece of in one form or another – emotional or economic. Gutting FCC, EPA, Interior, State Dept, etc. Those ideas aren’t Trump’s; he doesn’t have the intellectual heft to acquire fundamental understanding nor to develop theory.

        He’s simply following the time-honored method of exchanging political support for economic advantage. He’s a deal-maker, plain and simple.

        Trump is a privileged, emotionally undeveloped, not widely read kid under the “protection” of “regents”. His genius, like Reagan’s, was posturing, acting, and emotional manipulation.

        He is not terribly effective .vs. a Putin or a Xi (for example) or any highly emotionally and intellectually developed person. He’s good with the rubes.

        • d
          Jan 16, 2018 at 11:12 pm

          “Trump is a privileged, emotionally undeveloped, not widely read kid under the “protection” of “regents”.” VERY TRUE (not widely read is very complementary).

          “His genius, like Reagan’s, was posturing, acting, and emotional manipulation.”

          Wrong

          Ronnie’s genius was “Nancy”.

          The first female US POTUS and former first Female Governor of California.

          Ronnie did nothing, without Nancy’s approval, NOTHING. Ronnie always did what he was TOLD TO by Nancy. Some white house peopel had trouble with this, those that did, dint last.

  4. Jan 13, 2018 at 2:06 pm

    In the 30’s when private companies could no longer meet their responsibility to the public, at a profit, they abdicated, and the Fascists came to power to ‘make the trains run on time.’ In America the notion that a corporation is a public trust is widely supported by pseudo Libertarians like Rand Paul. To paraphrase him, “The BP event in the GOM is the price of putting gasoline in your car..” The point of this I believe is to ask what happens when BP mails in the keys or when profits decline or disappear and shareholders jump ship. How much do we offer them to stay? Corporate tax cuts, tax holidays, off shore tax shelters, international trade agreements which undermine labor? To name a few.

  5. Petunia
    Jan 13, 2018 at 2:30 pm

    I love your analogy of capital being indestructible like matter.

    Perhaps an answer lies in restructuring public service commissions to be more like bank examiners, with the power to oversee on a daily basis the soundness of the enterprise, and taking them over when necessary.

    Of course, this would require qualified people overseeing the business, instead of a bunch of the governor’s closest buddies.

    • wkevinw
      Jan 13, 2018 at 11:14 pm

      The way public utility commissions used to operate was like that. They were highly regulated, yet privately owned. That’s why utilities stock indices behave like they do (or did).

      They had a profit margin range, safety (physical) and soundness (financial) requirements that were monitored closely. Many a “line industry”, where they use public real estate/space/resources and provide a necessary product/service, has been successfully structured like this.-telephone, telegraph, railroads, water, sewer, etc.

      If the private company “goes bankrupt”, there can be an orderly process where operations continue and the private company pays whatever price is feasible. The taxpayers and private investors probably share in the pain, but the private company is not “bailed out”. If necessary, their assets are seized and sold off- again, while public services continue to function. (Note that the FDIC takes over bad (small) banks like this too.)

      • Kraig
        Jan 14, 2018 at 9:52 am

        This happened In the uk with railways and later post .com internet. The companies went bankrupt when the bubble burst, the gov stepped in and purchased the infrastructure (from the creditors not the company) the shareholders ate the losses because they were higher risk assets.

  6. Dave
    Jan 13, 2018 at 2:45 pm

    Duke Power downstream customers will be paying for their failure to engineer proper containment for coal ash. Clearly it’s a case of privatized gains and socialized losses, and there’s NOTHING we can do about it.

  7. Justme
    Jan 13, 2018 at 3:23 pm

    >>we believe that capital, like matter, is at times almost impossible to destroy.

    At times? What is that supposed to mean? Capital is incredibly easy to destroy. Any human effort that leads to no useful result (such as a never completed power plant) is a destruction of capital. Any human effort that damages an existing useful result (such as an existing and usable power plant) is a destruction of capital. In particular, any useless activity is passive destruction of capital, and war is an active destruction of capital.

    • BTilles
      Jan 13, 2018 at 3:52 pm

      Hi Justme,

      We never said that economic folly was diifficult. Quite the contrary. But of this $9 billion cancelled nuclear facility, only a very small percentage looks like it will be written off at present. Real capital destruction typically occurs when a failed corporate entity liquidates and investors receive the proceeds, often mere pennies against a dollar of claims.

      • Javert Chip
        Jan 13, 2018 at 6:35 pm

        BT

        If you really believe that “capital somewhat indestructible” statement, you’ve plainly never been trusted with the care & feeding of “capital”.

        The cited example of a canceled $9B power plant as a “small write off” may or not be accurate (I doubt it’s obviously not) , but it’s almost irrelevant: the $9B was expected to generate a reasonable return on investment.

        That ROI (about 10-20%/year) obviously will not be realized over the life of the cancelled investment (estimated 40-50 years), and that represents a huge opportunity cost.

        In any “-ism”, if you can’t invest most of your “capital” reasonably productively, pretty soon you won’t have any capital (don’t agree with my statement? Try raising capital for Venezuela’s oil company).

        • BTilles
          Jan 13, 2018 at 6:55 pm

          Hi Mr Chip,
          The sad part is I think ultimately we agree. The $9 billion plant is gone. But only $1.7 billion is being written off under current proposals. The rest will still be paid. That seems like pretty ” indestructible” capital.

        • Javert Chip
          Jan 13, 2018 at 7:39 pm

          BT

          As a retied CFO, I strongly, but respectfully, disagree.

          Capital and money are not the same thing, although, each can be transformed into the other.

          Capital lives in “pools of cash” were there is enough to actually invest in something to produce future value. No pool = no capital.

          A very simple example:

          Step 1: Giveody withdraws their savings, & fritters it away on n a country of 1M people, each having $1 in cash, YOU HAVE EXACTL ZERO CAPITAL.

          Step 2: If each person has $0.80 in cash and $0.20 in savings (national savings of $200,000), NOW YOU HAVE $200k IN CAPITAL. If capital is invested productively, the amount of capital increases.

          Step 3: If everybody withdraws their savings and writers it away in a trivial manner, everybody will still have $1, BUT THERE IS NOW ZERO CAPITAL.

          “Step 3” is what is happening to the discontinued nuclear plant – the capital pool has been drained, but thousands of workmen and hundreds of vendors decided up the $9B of capital. Not to mention that society did not reap the benefit of return on investment.

          For the record: Uber is a beautiful example of converting hundreds of millions of capital into tiny amounts paid to tens of thousands of (poor_ drivers – capital destruction as a bet something good will happen to the taxi industry.

        • Javert Chip
          Jan 13, 2018 at 7:42 pm

          mea culpa

          Step1 (above) should have read : “Given a country of 1M people with a total of $1M in cash, and with each person having $1 in cash, YOU HAVE EXACTL ZERO CAPITAL”

    • c smith
      Jan 15, 2018 at 12:41 pm

      “Capital is incredibly easy to destroy.” Absolutely. In fact, the parallel physical concept which applies best here is NOT conservation of mass, but instead the concept of ENTROPY. Systems tend to disorder and randomness, and capital is readily pissed away by that most natural human tendency – the desire to consume without effort or sacrifice of any sort.

    • Jan 15, 2018 at 1:15 pm

      I think you mean “capital is incredibly easy to TRANSFER.”

      Because when a nuclear power plant gets cancelled, after $10 billion have been spent on it, someone got that $10 billion and ran with it (construction companies, Westinghouse, employees, contractors, Wall Street….) That $10 billion didn’t get destroyed. It was just transferred.

      • Objective Function
        Jan 15, 2018 at 6:59 pm

        Come on Wolf, that’s a little more snarky than true.

        The vendors and their subs might have taken out nice margins, but this isn’t Teapot Dome. They didn’t stick it all in their pockets and walk away. Most of the capital is now entombed in cement and steel that will never earn a return (the discounted future cash stream being by definition what it’s worth), beyond scrap value less dismantlement costs. That’s pretty much ‘destroyed’ by any definition.

        • Jan 15, 2018 at 7:57 pm

          It’s not snarky. It’s a fundamental principle at work in the real economy. Money/capital does not disappear in the real economy. It moves. And someone always gets it. That cement you cite? It came from a cement supplier who got paid part of the money. That steel came from a steel supplier. Same with the machinery and equipment used to dig the hole and build the structures… the labor, the insurance, every dime that was spent went somewhere. That capital simply got spread around in the economy. That’s part of the velocity of money. Money moves, it’s transferred, not destroyed.

          Sure, for investors, the state, and other stakeholders, they no longer have this capital and they will never get a return. So they might FEEL like their capital was destroyed. But other entities got that capital and did something with it and it moved on.

        • d
          Jan 15, 2018 at 10:52 pm

          At least in this casem most of the Evaporated “Capital” did not end up in a private offshore account. Belonging to some corrupt politically connected official.

      • Objective Function
        Jan 16, 2018 at 9:33 am

        Well if that’s true then so is the Keynesian chestnut about digging holes and filling them in.

        Perhaps Deng Xiaoping was right about not caring which colour the cat was, but wrong about whether catching mice matters to society writ large? I expect his heir Chairman Xi hopes so. ;-)

  8. James Brook
    Jan 13, 2018 at 4:13 pm

    Take a look at what is going on with Carillion in the UK. Private company with huge debt and pension liabilities. Private when there is a profit and people suggesting going public when the books look bad.

  9. Boyfromtottenham
    Jan 13, 2018 at 4:28 pm

    Surely the greatest example of destruction of capital is war, or am I missing something?

    • BTilles
      Jan 13, 2018 at 6:47 pm

      Hyperinflation? (often accompanying political instability)

      • d
        Jan 14, 2018 at 6:29 am

        Are hard assets also Hyper-inflating or just consumables and imported commodities.

        In hyperinflation events everything does not hyper-inflate or hyper-inflate evenly..

    • Javert Chip
      Jan 13, 2018 at 6:50 pm

      You are correct.

      Wars can juice up defense industry& GDP (which may include all kinds of non-lethal stuff, like C-rations) for a brief period of time. Once an economy exceeds it’s tipping point, the whole country runs rapidly down-hill.

      Japan’s WWII lasted from 1931-1945; its economy expanded dramatically until about 1942. By 1944-5, Japan’s civilians were cold and starving (among other things).

      After WWII, the USA not only had to help feed Japan, but the USA’s Marshall plan helped feed & rebuild Western Europe. Some argue the Marshall Plan was done primarily to help the USA – if you were a starving Japanese or Western European, you’d probably beg to differ.

      • Alfred (Melbourne)
        Jan 14, 2018 at 3:12 am

        “After WWII, the USA not only had to help feed Japan, but the USA’s Marshall plan helped feed & rebuild Western Europe”

        The Marshall plan came into being in 1948 – and people did starve for 4 years until the Americans worked out that these countries would turn Communist unless they did something.

        https://en.wikipedia.org/wiki/Marshall_Plan

  10. Jan 13, 2018 at 4:29 pm

    Crypto-tokenize the utilities.

  11. Scott
    Jan 13, 2018 at 6:28 pm

    Many politicians in South Carolina are trying to privatize Santee Cooper in response to the nuclear fiasco. This is just another way of socializing the losses. In addition, ratepayers in Mississippi are paying for the advanced carbon capture plant in Kempler, which is now just converted to burning on only natural gas. Both of these have been made possible by regulators who are too close to the utilities and by enabling legislation.

    Why not just let them go bankrupt? If the new equity is not sufficient, then the bondholders would have to take a haircut too, maybe they would have a lesson to lend money for risky projects

    • BTilles
      Jan 13, 2018 at 7:15 pm

      Hi Scott,

      Privatizing Santee Cooper would probably raise prices, not lower them because of the different financial and compensation structures.
      As for the cancelled nuclear plant, the regulators were excluded from the process in SC by the legislature.
      And as for bankruptcy, both appear healthy enough to limp along indefinitely.

  12. Cashboy
    Jan 13, 2018 at 7:04 pm

    Another company in the UK is Carillion PLC that has 19,000 employees and is bankrupt.
    It is having meetings with the government tomorrow (14/01/2018) to basically discuss a bailout by the government (read UK tax payer).
    This is because it has contracts with the government for services.

    Carillion was basically bailed out only 2 years ago by the government by Carillion being awarded profitable contracts for the constuction of HS2 (new pointless new rail system in the UK ) when the government was aware it was bankruot but made the banks extend its finance.

    • Steve clayton
      Jan 14, 2018 at 3:08 am

      Agreed cashboy with your comments. Carillion were awarded a legal advice contract by the government where they undercut other genuine companies. Once they realised they were making huge losses on the contract they couldn’t service it, in the end other legal companies had to cover their work. Awful company.

    • MD
      Jan 14, 2018 at 9:25 am

      Yes the ‘wonders of the free market’ – you are of course free to lie in order to get your hands on taxpayer cash. Worry about it later by which time you’ll probably be in a new job somewhere else anyway – so lie and get that bonus!

      Agreed about HS2 – completely pointless, very expensive job creation scheme from a bunch of clueless feckwits who, after 40 years of neoliberal nightmare and banker-worship, have no idea whatsoever about creating a cogent industrial policy (“Let’s make a twain like gweat gwandma did!”).

  13. interesting
    Jan 13, 2018 at 7:59 pm

    “When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”

    ― Frédéric Bastiat

  14. robt
    Jan 13, 2018 at 8:14 pm

    It would be helpful to know if Virgin and Stagecoach were obligated to base their bid on government-supplied travel statistics and projections instead of being allowed to conduct their own research. It seems obvious that no company would offer to purchase based on projected losses, unless of course initial losses would be compensated by future profits as part of the business plan.
    There is a also history of many governments ‘privatising’ services, but fixing selling prices for political reasons while input costs cannot be controlled. This is usually the reason for privatising services in the first place; government sets prices too low for political reasons, and doesn’t make sufficient sustaining capital investment to operate efficiently and improve operational assets, but instead diverts excessive amounts to bureaucracy, or to mismanaged projects, driving the service into insolvency. Any government utility, even if presented as a stand-alone entity is an example of that.
    To those who expect price increases, at least initially, upon privatisation, it is most often a necessary action simply because the services have been underpriced to buy votes.

    • Justme
      Jan 14, 2018 at 1:33 am

      >>obligated to base their bid on government-supplied travel statistics and projections instead of being allowed to conduct their own research.

      Oh, balderdash. Nobody can “forbid” that a buyer does their own market research and due diligence.

      >>This is usually the reason for privatising services in the first place;

      Nope, the usual reason is that private enterprise has corrupted government and convinced them to sell a monopolistic asset at below market value. The buyers are planning to use the monopolistic pricing power to squeeze the consumer. This is what happens every time an electric distribution company is privatized, in particular.

      Your ideology cannot cover up what is really happening: Privatization of profit and socialization of risk.

    • Cashboy
      Jan 14, 2018 at 2:02 am

      The bid for the franchises was based on the bidders (Virgin and Stagecoach) own assumptions.
      Therefore Virgin and Stagecoach either overestimated revenue or underestimated costs or both.
      Surely the companies that get the franchise should have an insurance bond in the event of failure payable to the government.

      • Kraig
        Jan 14, 2018 at 10:03 am

        No need for a bond, they pay gov for the franchise and if they can’t deliver it should be reopen to bidding on the market. If virgin/stagecoach can’t so it go ask there competitor.

    • MD
      Jan 14, 2018 at 9:41 am

      All very simple in the world of the ‘libertarian’:

      “it’s all the fault of gubbinment!”

      Even got the boiler-plate reference in there to ‘wastage on bureaucracy’ (no empirical data ever offered…)!

      It would be funny if it wasn’t so pathetically tragic.

    • Kraig
      Jan 14, 2018 at 9:59 am

      You can read all about it here

      https://www.gov.uk/government/collections/rail-franchising

      In a word no, the private company provide the estimated.

      Funnily its 5 times the cost of countries with public systems in Europe despite the fact that private companies are suppose to reduce costs through competition.

  15. roddy6667
    Jan 13, 2018 at 11:14 pm

    In America the taxpayers pay for the losses and bad decisions of the utilities. When they do make money, it gets absorbed by the top heavy management and the dividends get distributed to the top 5%. Besides that, there need to be a state supervisory body between the corporation and the citizens to make sure the utility is being run right. These agencies are huge and suck up a lot of the taxpayers’ money.
    I never thought about much until I moved to China. The electricity is very cheap. The lights never flicker, nor do we have brownouts or power failures, at least in this part of China. The same is true with the other utilities, all run by the state. Water, cable TV, Internet, house phones, and mobiles phones are all very cheap and reliable. No corporation has to make a profit. In private enterprise, corporations get greedy and make some rash decisions to boost profits, to the detriment of all.

  16. mean chicken
    Jan 14, 2018 at 12:35 am

    I just knew a former governor would be getting paid to help get ‘er done.

    http://www.thestate.com/news/local/article193292209.html

  17. MD
    Jan 14, 2018 at 9:17 am

    “What’s good for business is good for society”…

    …one of the biggest, fattest lies and deceptions ever perpetrated!

    The British were hoodwinked decades ago during the rail ‘privatization’ wherein the taxpayer picks up the tab for infrastructure maintenance whilst profits (of which there are none without the state shilling being injected) go into private pockets.

    Meanwhile, the hand of the (much-hated and reviled) state is once again poised in its pocket to clear up the pending mess of Carillion, recipient of neoliberal outsourced largesse for a very long time.

    Oh well – at least stock markets are at record highs. And apparently that is all that matters. We can jeep clinging to that as we career off the societal precipice, with the Chinese laughing as we fall.

    • Kraig
      Jan 14, 2018 at 10:06 am

      Perfectly sums it up. Hoodwinked at the same time with the great council housing sell off (and no replacement) and ripping up of the trams.

  18. xhidarta
    Jan 14, 2018 at 12:15 pm

    Regretful as it is, the nuke plant fiasco, it has a silver lining: one more Cancer Factory not built. I certainly wish the other two plants being built get crushed in the same manner. The whole nuke industry anyway, is a completely socialized enterprise under the guise of private company builders and operators. Were not for the Price-Anderson Act of ’57 not one single plant could have ever been built in this country. Or anywhere else for that matter under similar versions of this act whereas the goobmint take all the risks, and the corporations all the profits. Put another way, try to insure your house against a nuke accident and see how that goes.

    • Kraig
      Jan 15, 2018 at 4:08 am

      Why not a price Anderson act for geothermal plants then? Perhaps that’s what we need.

  19. BTilles
    Jan 15, 2018 at 10:55 am

    You’re right. You can’t buy homeowners or renters insurance to protect against effects of radiation/nuclear meltdown.
    But look at the bright side. The relatively modest amounts in the Price Anderson fund are designed to provide some offset to this.

  20. c smith
    Jan 15, 2018 at 12:22 pm

    “…South Carolina’s electricity consumers ultimately (even if unwittingly) incurred a portion of the financial risks and they are being asked to continue to pay for past mistakes…” At least Dominion is offering to absorb some of the costs, split in the future between D shareholders, bondholders customers and all Federal taxpayers (the lower corporate tax rate funds part of the deal). A “no deal” response from SC regulators leaves the entire cost on the shoulders of SCANA and SC ratepayers. Half a loaf is definitely better than none here. Hopefully SC regulators will see it that way.

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