26 Sep 2011

Non-profit games

In Chapter 7 of my book, I wrote [p. 145]:
Good managers protect us from ourselves, but bad managers magnify waste and inequity. How can we tell good from bad? How can we tell if they serve the public or themselves? The main barrier is asymmetric information. Managers and politicians know their abilities and actions. They understand the mixture of skill, effort and luck that resulted in success or failure, but outsiders will never know the exact mix.
This paragraph refers to the Principal-Agent problem, i.e., we do not know if managers are serving customers or their own interests.

This problem is particularly acute in the utility sector where customers must buy from a local monopoly and it's difficult to measure performance efficiency.

Some people claim that mangers -- as public servants -- can be trusted; they also assume that "non-profit" status means that managers cannot personally benefit from exploiting customers, but plenty of evidence contradicts these hopeful thoughts:
  • In my PhD dissertation on the Metropolitan Water District of Southern California (MET), I measured "public mindedness" among MET managers, which was average. That means that managers are just as likely to put themselves first as you and me. The key is that they -- as our agents -- have the opportunity to do so.

  • How? The OC Register reports that 70% of the MET's staff make more than $100k per year -- 90% make more than I do! I've visited MET's very nice Los Angeles headquarters and can affirm that those workers are well compensated for their 9 - 4:30 efforts. Managers use MET's $2 billion budget to take care of water AND themselves. But remember kids, they do NOT make a "profit" :)

  • Speaking of MET, one of its member agencies, Central Basin MWD, spent customer money planting fake news stories extolling the virtues of CBMWD. Fleck details his involvement as a journalist and watcher of utility incompetence. Looks like CBMWD also has a little too much money to spend.*

  • In totally-related news, the San Diego County Water Authority (another member agency of MET) is -- again -- suing MET for charging "too much". In my dissertation, I explain how cross-subsidies unequally distribute costs and benefits among member agencies, even as MET "makes no profit."
Can for-profit, investor-owned utilities abuse customers in the same way? Sure, but they are watched much more carefully by regulators (MET is "self-regulated"). I am going to their annual conference next week, and I will ask more questions on IOU performance and transparency.

Bottom Line: Water monopolies CAN put customers first, but they do not automatically do so. That's why I want to increase competition and transparency in water utilities; they can deliver better customer service at the same time as they make "no profits."

* These problems are not limited to Southern California: Japan's TEPCO -- the local monopoly responsible for the Fukushima nuclear meltdown -- spends $340 million/year advertising its virtues and more on lobbying politicians, instead of just cleaning up its act.

H/Ts to CG, DL, AR and NT