Friday, August 07, 2009

Nickel and Diming Don't Make Sense

July 7, 2009, 8:50 a.m.

How is MidAmerican Like a Country Club?
They Both Have Membership Fees

(brought to you by*)

This is not a blog entry about "the high cost" of this or that. I don't disagree that monopoly and oligopoly price-setting, campaign-contribution-purchased government intervention with tariffs and price supports, and other factors unrelated to cost of production or quality of products, often result in our paying more than is justified. But that's a blog entry for another day.

What a glance at my current gas and electric bill reactivated was my irritation at what I think of as "nickel and diming" charges.

Why do businesses do it?

Is the income really enough to offset the loss of customer goodwill?

Motels. Normally I shop for cheap motel rates when traveling. But occasionally, when doing a public lecture, the sponsor insists I stay in the $200-300-a-night "conference hotel." (If they don't insist I usually still try to save money, even though it's their money, not mine.) But inevitably, these will be the hotels that want to charge as much as a dollar for every local call. (And don't get me started on the mini-bar prices.) And of course there's no free breakfast.

I will occasionally ask to speak to the manager to make my pitch. I'm not trying to reduce their cash flow, I'm just trying to rationalize it. I'll say, "Why is it you need to charge for local phone calls when I can go down the road to the Motel6, pay a fraction of your room charge, and make all the local calls I want to for free? Why don't you just charge $250 a night, instead of $200, and not charge for the incremental-cost-free-to-the-hotel local calls?"

(As a sidebar, do you know why it's called Motel 6? When I was a kid, Motel 6 charged $6.00 a night. It was "Motel $6.00." On a crowded weekend in Duluth recently the Motel 6 rates had progressed from $6.00 to $94.)

Cheap hotels offer relatively costly breakfasts for free. Expensive hotels' coffee shops and restaurants do not; it's easy to pay as much as $15 with tip, and often much more, if you want more than just coffee.

Auto mechanics. I've received bills from mechanics that include a charge for "rags." It's a pittance; I can afford it. But when anything done to a car seemingly ends up costing $200 why bother charging anything for the basic shop supplies that will be used in almost any repair job?

Gas and electric. My primary problem with public utility pricing for gas, electricity, and water has to do with the counter intuitive -- and environmentally disastrous -- formulas by which "the more you use the less you pay" (per unit of whatever). The customer is punished, not rewarded, for their efforts to reduce their impact on the planet. But, as with overpricing generally, that's also a topic for another blog entry someday.

This morning I want to focus on what MidAmerican Energy -- "obsessively relentlessly at your service" -- does when it becomes equally obsessive and relentless in coming up with tricky ways to charge you more money. (In fairness, I will acknowledge that the company is making some efforts at energy efficiency, including the offer of free home surveys which I find very helpful.)

They call it a "Basic Service Charge." And although I am only one customer I get two of them, one for electricity and one for gas. This is no "rag charge." It's substantial -- especially when compared with the cost of what I'm buying: electricity and natural gas.

The electric "basic service charge" is, at $6.00 a month, greater than a 10% add-on to my electric bill -- which, at about 9 cents per kilowatt hour, is already roughly twice what the really big users pay.

The gas bill is worse. Already I'm being charged for both the gas (calculated in "therms" rather than the "per 100 cubic feet" units the company's supplier is probably using) and a "delivery charge" that is as much as two-thirds of the price of the gas itself. But the "basic service charge" ends up being a 100% tax on top of the total of those two!

Just exactly what is this "basic service" for which I'm paying as much as the price of the gas -- and its delivery -- combined?

Again, I'm not -- in this blog entry -- suggesting that MidAmerican's cash flow is greater than it needs to be, or can appropriately be (though I'd be stunned if that were not the case). As an FCC commissioner I used to set public utility rates -- in that instance for AT&T, but the basic formulas and considerations are similar. While I see many advantages to municipal ownership (and rural electric coops), including the elimination of the cost of return on investment to shareholders, if you are going to have private ownership of public utilities executives' salaries and shareholder return are going to be a part of the cost to consumers.

Nor do I object to "transparency." Indeed, I'd like to have a lot more of it from the utilities and the Iowa Public Utilities Commission, drilling down to really explain what their costs are and why.

What I object to is what appears to be either a tax imposed by a non-governmental body or a sort of "membership fee," like Sam's Club charges, for the privilege of being a customer of MidAmerican -- a matter as to which few of us have any meaningful choice of alternatives.

(And of course I also object to the amount of the membership fee, and the fact that it disproportionately impacts the poor -- and those making an affirmative effort to conserve natural resources and reduce pollution -- in the same way the rate structure does. But for now I'm just focusing on the nickel and diming issue.)

Ideological itemization. The phone and cable bills itemize the various charges various governments require they collect. OK, I guess that's a kind of transparency. But I'm not unmindful that it's also a useful bit of anti-government ideology disguised as a monthly bill; a reminder of those "tax and spend" (or "borrow and spend now, tax later") folks in Washington and Des Moines. But I won't dwell on that.

Nickel and Diming. Can you imagine what this nickel and diming would look like on your grocery bill receipt?

"Can of peas, 22 cents (includes manufacturer's, wholesaler's and retailer's profit).
"Packaging charge, 11 cents.
"Delivery charge, 8 cents.
"Stocking charge, 6 cents.
"Check out charge, 3 cents.
"Basic service charge, 19 cents.
"Total, 69 cents."

It would be laughable.

Why is it not equally laughable when it comes to local phone calls from motels, mechanics' rags, and MidAmerican's membership fee "basic service charge"?

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson

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1 comment:

John Neff said...

A long time ago they did not list the basic service fee and the just gave a total cost. They changed the bill because some people would use no gas or electricity during the billing period but their bill was not zero. The reason the bill was not zero is because they were being charged for meter reading, billing, administration, maintenance costs, taxes and when applicable a franchise fee.

In response to complaints about the bill they lumped all those charges together and called it a basic service charge.

It costs the most to provide service to residential customers, not as much for commercial customers because they are concentrated in small areas and very little to industrial customers that own and maintain their own substations and distribution systems. If the industrial customers use off-peak power the rates for all customers are reduced because the overall system efficiency is improved.

Another factor is that they are able to bill a much higher percentage of what they produce for industrial customers because distribution system losses are lower