Tuesday, May 16, 2006

On Killing the Goose that Lays the Golden Egg

The Advocate carries the odd story, splashed across the front page of its Acadiana section this morning, that retells the tale one Steve Pellessier told the Concerned Citizens for Good Government yesterday. Pellessier wants Lafayette to sell off LUS to pay for current shortfalls in road funding.

Thank heaven that at least some folks have a classical education. Joey Durel responded humorously but basically dismissively to the suggestion by saying that do so would be like getting "rid of the goose that laid the golden egg."

The idea of selling off a consistent money-maker, to the tune of 17.2 million and a quarter of the city-parish budget each year, for a one-shot, quick fix play to meet the parish's road needs following Katrina & Rita is plain foolish. It has to be one of the purest examples of the lessons of Aesop's fable concerning "the destructiveness of greed, the virtue of patience."

First, historically LUS has had lower prices than its private competitors (the current rough equity is unusual) and Pellessier appears to know that. Citizens would end up paying twice: once in the form of 25% higher taxes--the money has to come from somewhere--and once in the form of higher utility bills. Second, and this point appears to have very discretely not been raised considering the current divisiveness of the issue in the council, it would be a sale of city assets to benefit almost solely suburban needs and the downstream cost of more expensive electricity would be borne solely by city residents as well. Politically this should be a major nonstarter. The current push to dissolve the city-parish form of government is mostly based on formless resentment. Any movement in this direct would give that movement a basis in real injustice and a real constituency.

Beyond the foolishness of the idea of killing the goose you've got the fact that this goose is fertile. The goose in the fable is obviously sterile--it lays golden eggs but those eggs don't hatch. It is unique. LUS however is incubating another goose that promises to lay even larger golden eggs. The mere threat of an LUS Telecom network has kept Cox from raising prices. The reality of a cheaper, more capable alternative will save us all a bundle off our monthly bills.

Beyond the cost savings we should all be aware that the income to the city-parish coffers should be substantial. That 17.2 million LUS gives us comes chiefly from electricity...a low-margin utility. The money coming into the coffers from the Telecom division will mostly be from high-margin cable industry competition. How much do you spend on electricity? How much do you spend on cable, internet, and phone service? Think about it...

If there is anything that's more foolish than killing the goose that laid the golden egg it's killing one that has offspring that also lay golden eggs.

Though the Advocate story doesn't mention it Pellessier, in a recent letter, did say that LUS could keep its recently voted-in telecom division. That's a crock and Pellessier, an opponent of the LUS plan, should know it. Much of what makes the telecom unit economic--and the main reason more cities are not in a position to make the same decision Lafayette has--is that Lafayette already owns and operates the necessary infrastructure in poles and maintenance crews in order to service its electrical division. It is hard not to suspect that a suggestion this off the mark isn't motivated in some part by left over resentments from having lost that fight.

You'd think a "Certified Commercial Investment Member" -- someone who specializes in commercial real estate investments--would understand that trading a growing revenue-producing asset for a one-shot wasting asset is always a bad idea. Don Bertrand makes the point more succinctly:
Don Bertrand said he's glad to have a discussion about how to fund roads, but that LUS is the city's best asset. Bertrand said there are other options to raise funding without giving up a revenue-producing entity like LUS.

"When we're done, we'll have roads, but roads don't produce money," Bertrand said.


Anonymous said...

Using the logic that LUS electric makes money and thats why we shouldn't sell it makes no sense. Using that logic, why not charge more for utlities and make more money. Add to that the fact that in 12% in lieu tax is a regressive tax which hits the poor the hardest. Plus using the assumption that LUS "makes 17 million", if you divide that by the $900 million they say its is worth, thats less than a 2% return on the investment. Lafayette pays what some 4 to 5% for its bonds. Now does that make sense?

Besides, how do you know if we have "low utiltiy rates"? If you compare it to Slemco, you would find we pay more. If you do your research you will find that LUS does not have "low utlity rates" in comparision to the private sector in LA.

What we do have is no competition and no choice. Now thats a natural monopoly for you.

John said...

oh oh Anono's back.

First let's repeat the basic point: Selling a property that gives you a return (and makes other revenue generating properties possible) is just plain dumb if what you want to buy is a buncha of roads whose upkeep will further drain the public treasury.

This is the equivalent of selling a business that is generating revenue in order to buy a big honking boat with a ton of upkeep costs. As an investment it is just plain stupid. (There might be other values in the world but as an investment...)

I don't think you've found a way around that basic immovable object.

Let's see if there's an irresistible force here:

Your most fundamental mistake is that you think that LUS is a for-profit entity. It isn't; it is a public utility. There are a lot of folks that just can't wrap their minds around that.

Making money is not nearly LUS' first purpose and not why we should value it. In descending order of importance:

1) Owning it gives us local control; FREEDOM, freedom to act. (e.g. build fiber)
2) Owning it keeps local wealth local; every penny shipped out of local areas saps the economy and LUS minimizes that in a major way.
3) Owning it keeps prices lower; that's been true over the years; the current close to equal status with the private providers is anomalous. A co-op, Slemco, is not a counter example--it also is a publicly-owned local entity with the same virtues as one owned by the municipality it serves.
4) Last on the list is turning money over to the common coffers. This is a good thing since it knocks 25% of Lafayette's taxes. But it's not the organization's primary purpose

Paying fees to LUS is not a tax. Sorry, No more than is paying fees to Entergy. It's a fee for service. And LUS services, again historically, has been a very good deal. A rational analysis would surely show that overall we've all gotten by cheaper because LUS was publicly owned. That's the bottom line. Dressing it up with the scary tax word is misdirection. It is the poorest who benefit from cheap services the most. Always have; always will. I think you'd rather poor people have paid more all those years in order to serve your ideologically-driven sense of what is proper. That's too much to sacrifice to the ideology of private greed over public good.

Because making a "profit" is not the purpose of LUS I am massively unmoved that a 2% profit seems small to you. The purpose of a publicly owned utility is to minimize the difference between costs and fees; you just want to have enough extra to have a responsible cushion. (This is precisely the opposite of what makes a private company successful.) 2% sounds pretty rational. So I'm happy LUS is doing its job right. ...Now you're right that LUS is not making the 7-8-10 margin that private companies do. If a private corp bought out LUS they'd have to raise our rates in the 8-10 range (actually more, remember their massive interest on borrowing to buy us out). A private corporation would have to raise our rates very substantially to justify the purchase. At the risk of seeming redundant: this would be a bad thing for the citizen.

I'm glad you bring up the "natural monopoly" point. There is no quarrel but that electricity is a natural monopoly. Our only choice is whether or not it should be a publicly owned monopoly run for local benefit by local people or a private for-profit corporation run for the fiscal benefit of far-away shareholders by managers who barely can find Lafayette on a map.

I don't find that a difficult choice to make at all. Repeatedly over the years neither have the people of Lafayette. The last time they expressed this sentitment was last July 16th.