Ohio Holding Companies, Obsolete Technology and Rent Taking

I am a regular reader of Paul Krugman’s column in the New York Times.  Unlike most US economists, Mr. Krugman actually knows how to apply economic theory to the realities of our economy.  I don’t agree with everything he writes, but today’s column provides an excellent picture of what both AEP and FirstEnergy are trying to do in WV.

Krugman’s piece is called “Profits Without Production.”  Here is his main point:

The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.

Mr. Krugman points to the practice that now dominates US business strategy: not expanded production, not investment in innovation, but positioning your business as a monopoly so that you can just sit back and charge others extra for your existing product, based on obsolete past investments.

This is exactly what both AEP and FirstEnergy are trying to do with their coal plant transfers in WV.

Instead of investing in innovative and money saving new technologies in renewable generation and improving the efficiency of electricity use, AEP and FirstEnergy are dumping expensive and obsolete technology that they already own into the WV rate base where WV rate payers will be forced to cover all their costs plus guaranteed profits of 10% or more for the next 25 years.

Instead of moving forward and becoming better, WV’s electrical system would remain shackled to the past, while AEP and FirstEnergy shareholders sit back and collect their rent as regulated monopolies in our state.  Instead of making investments in efficiency and locally based renewable power that will create jobs across WV, the companies cling to their obsolete centralized business model.

Read Mr. Krugman’s column.  It will provide a very clear picture of what is behind the business strategy of the Ohio-based companies that own WV’s electrical system.

3 thoughts on “Ohio Holding Companies, Obsolete Technology and Rent Taking

  1. I fear this has largely happened in what remains of American manufacturing. Manufacturing survives in the U.S. because of innovation and increased productivity. I fear this last recession forced companies to cut the engineers and creators of increased productivity. Consequently there is nothing left but making profits on depreciation in markets they already own for the time being. When the depreciation on the books runs out they sell the asset and but another’s depreciated assets.

    Innovation has become irrelevant as CEO’s seek profit from assets they already have without looking to the future.

    Seems to me the the wind industry does a lot of asset trading, especially after the Production Tax Credit has expired. Michael Skelly of Clean Line Energy had an interesting term for it. He called it “churn in the water”., but when ratepayers are asked to pay for an asset that they already paid for again and again, it’s something else. It’s criminal.

  2. Great post! I think I’ve read Krugman every Monday/Friday for over 8 years. he’s got a great economic mind and batting average on being right. you cite a perfect example of businesses and conservatives using government to distribute money upwards. As my friend Dean Baker says, money doesn’t fall up.

  3. Also not investing in enough staff and equipment to do regular maintenance, replacement, strengthening and upgrading of the existing distribution system, one reason, IMO, that they take so long to repair after storms.

    Then they consider repairs to be extra costs to be paid by customers instead of being in the regular cost of business. Year by year we get a degraded, weakened, outmoded system that someday will be beyond repair.

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