"Twenty-Six Miles Across the Sea"

I’m betting you didn’t know this: Southern California Edison is in the water business! But, as reported in last Saturday’s LA Times, they would like out of their Catalina Island water system. http://www.latimes.com/business/la-fi-catalina-edison6-2010mar06,0,1622439.story.
Like many utility arrangements, SCE’s unlikely foray into the water business was largely by accident, brought about by the unique circumstances posed on Catalina Island. They were providing their normal electric service there – and with great difficulty, I imagine, due to the lack of any connection to the rest of their system. The lack of any established or neighboring gas or water utility, and the small population base (1800 residents) meant that no other entity was particularly interested in operating there. But, the residents and tourist-based businesses needed someone, and SCE filled the void.
Well, it seems that SCE finally found another company crazy or desperate enough to purchase the water system. The bid is $35 million, or about $20,000 per customer. Let’s say the purchasing company wants a 10-year payback. That means the monthly charge that they need to receive would be $167 – PLUS the actual cost of providing them water service, PLUS the cost of any system improvements, PLUS a little profit for the company willing to risk so much capital. Sounds like water rates could get pretty high on Catalina Island!
The residents have been doing some math, too, and have reached a similar conclusion. They decided that they would like to purchase the water system from SCE – very creative. However, they don’t want to pay anything close to the other company’s bid: they think it’s only worth $5 million. Which offer would you seriously consider if you were SCE?
One of the great misnomers in California government is the “Public Utilities Commission.” It actually has nothing to do with “public” utilities – those agencies “regulate” themselves, and establish their own fees. Each publicly-owned water company is free to charge their customers whatever they want, with no external oversight. The underlying philosophy is a sound one: the local residents/property owners/taxpayers will be able to monitor the public utility, and “vote the bums out” if necessary.
The PUC actually only regulates private utilities – like SCE. For SCE or any other private firm to raise its rates, it has to convince the highly political PUC that such rate increases are absolutely essential. Months of public hearings and notices, and reams of paperwork go into even the smallest rate increases. And the PUC also oversees the sale of such utilities.
Suppose for a moment that you have owned your home for several years, and you would now like to sell it. You found a buyer that offered you $350,000. Your next door neighbor decides that they want to buy the home from you instead, and appeal to some government agency that they should be allowed to do so – for only $50,000. How would you feel about that, as the long-standing owner? Perhaps you’d feel just like SCE must be feeling right now.
Will the PUC steal $30 million from SCE to satisfy the people on Catalina Island? And if so, who will reimburse SCE for their loss? My guess on this final question is: me. Along with every other SCE customer, I will be subsidizing the residents of Catalina Island for this “steal” of a purchase. Assuming you don’t live on Catalina Island, does that sound fair to you?

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