Wednesday, November 13, 2013
Full Marks For Showing Up
"Contempt", so researchers have found, is one of the strongest predictors of divorce from amongst the palette of potential factors. It is precisely such "contempt" that describes how UK Utilities feel about, and are treating, customers, and taxpayers, and indeed, the taxpaying-customer. Since I let my feelings about privatized natural monopolies be known several weeks ago in the post Freedom To Choose (to be Buggered), politicians (both right and left) and journalists have joined the fracas putting the Utilities on the defensive (but hardly inflicting anything more than a paper-cut upon the beasts).
Listening to SSE's spokesman on the BBC this morning was demonstrative of why "contempt" may not be sufficiently powerful. He was immediately taken to task for trumpeting to Shareholders, SSE's success at extracting better than average returns and better than average dividend growth from a regulated entity, and whether or not there was something wrong with this taking into all the shenanigans that SSE (and the other Big 6) conjure and perpetuate in their rape and torture of consumer. Some hemming and hawing ensued, leading ultimately to the following justification: SSE needs to provide investors with better than average returns and better than average dividend growth in order to entice and reward investors for the billions of pounds of investment that SSE needs to undertake to deliver the services to their customers - a justification he ended with an extremely self-satisfied remark about how the "lights go on every time their customers flick the switch". Now it must be said that using the delivery of the service for which you have a near-monopoly as a benchmark is like asking for full-marks by turning up in school, ignoring theft and abuse of consumers. The true contempt is that SSE hasn't asked equity investors to fund capital investment, and their ability to raise debt on a vast base of hard assets is hardly related to their ROE. Capital investment is funded by cash flow extracted from customers in addition to the cost of the commodity provided and its delivery. And where regulation is light, transparency dubious, this is always conflictual. Knowledgeable consumers should want this capex depreciated over the longest possible time period to minimize the present value extracted from their pockets whereas Utilities will desire to front-end the depreciation so to minimize the amount of capital (and risk) from their pockets and hasten the transfer of wealth from customers to Shareholders & Management. It is truly that simple. Despite being capital intensive, with a captive customer base, and the stability associated with providing a utility-service, such enterprises don't actually require much "capital" (equity), for it is possible to finance required capex at much lower rates than the rate of return guaranteed to utility shareholders.
So to suggest that the reason SSE is extracting excess profits and paying generously to shareholders is to fund future capex for the benefit of their customers is plain horseshit. IF returns were to be reduced due to tighter regulation, the capex will nonetheless occur (mandated if need be) and be funded by customers (possible at depreciation schedules more attractive to their interests and bills). And IF this were to occur then the disappointed shareholders may sell their shares (or not) to reflect this new reality. The secondary market in equity doesn't or shouldn't effect capex decisions where capex is funded by revenues - NOT the equity capital markets.
The BBC inquisitor called him out for "setting the bar" for success so low at "one's light's going and staying on", as well as the absurdity and disingenuousness of petty theft via confusing tariff structure and so forth, but sadly didn't take him to task for the larger contemptful lie that it is somehow not zero sum and that customers are somehow better off when SSE is paying large bonuses to management and large dividends to shareholders.
I cannot help but think with such piggy unenlightened management this is - eventually - going to snap-back and end badly for shareholders - worse than it otherwise might be. Wafer-thin mint...Sir?