”Affordable” Utility Service: What is Regulation’s Role? Using the nation’s economy stressed, politicians are pressuring regulators to produce utility service ”affordable.” This picture has three problems. Wealth Redistribution is Not Regulation’s Department Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to pay for those costs, then designs rates to create the revenue requirement. Rate design makes each customer category bear the costs it causes. None of these steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue only whenever we jigger the numbers—if we lower rates for the unfortunate by raising rates for others. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of one class to benefit another, with this particular exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck with all the rates regulators set. In place of shifting costs between customer classes, regulators might redistribute wealth in a different way: by “taxing” shareholders, i.e., reducing shareholder returns below the otherwise appropriate level. But taxing shareholders isn’t any more the regulator’s domain than is taxing some other clients. And it’s really likely unconstitutional: Having invested to serve the public, shareholders expect ”just compensation,” undiminished by a forced contribution for affordability. Moving money among citizens is vital to a society that is fair. Poverty is intolerable and charity that is private suffices, so government steps in. But helping the luckless should be done by political leaders, who must justify their actions to your electorate; not by professional regulators, whose focus must certanly be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends using one’s wealth and income, as well as on the cost of other products. The poor could better afford utility service when we raised their income and increased their wealth. Or if perhaps we lowered their cost of housing, health care, transportation, or education. But these initiatives are outside regulators’ authority. To create regulators in charge of affordability is illogical. Cheap Energy is politics that are cheap Politicians who argue for affordability use the easy road. To legislate economic development, greenness, reliability, energy independence, and technology leadership, all efforts that increase costs, while commanding the regulator to help make service ”affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics. When politicians call for ”lower rates,” the electorate feels entitled to receive instead of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is ”take” in place of ”give.” And when lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, while they question their capability to distinguish pander from policy. These are the total results when politicians avoid their responsibility for affordability. ”Affordability” Undermines Regulation’s Responsibility Mathematician Carson Chow says he’s found the reason for our obesity epidemic: low food prices. Studying 40 several years of data, he spotted both causation and correlation between girth growth and cost declines. He traced these trends to government farm policy shifts (from spending money on non-production to stimulating full production) and technology boosts (which lowered production costs). The reduced the cost, the more production; the greater amount of production, the greater (fast) food; the greater amount of food, the greater amount of calories available; the greater calories available, the more calories consumed. See C. Dreifus, ”A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). Our company is both over-consuming and under-appreciating: Dr. Chow discovered that ”Americans are wasting food at a progressively increasing rate.” (Fairness point: Chow has his doubters. See Michael Moyer, ”The Mathematician’s Obesity Fallacy,” Scientific American (May 15, 2012). So what does food need to do with ”affordable” utility service? A regulator’s job is always to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is certainly not a variable. Which will make service affordable to your unlucky, the commission will have to lower the price below cost. That leads to overconsumption, to Dr. Chow’s ”waste.” This inefficiency hurts everyone. Economic efficiency exists when no action that is further create benefits without increasing costs by more than the huge benefits. Conversely, economic inefficiency exists once we forego some action that, if taken, could make someone better off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to leave good results on the table, makes everyone worse off. Underpricing when you look at the true name of affordability makes someone worse off, unnecessarily. How sensible is that? Actions for Affordability: The Right Roles for Regulators Unless essential services are affordable, government will not be credible. Regulators, being element of government, have to help. (A commission staff chief told me 25 years ago, ”Sometimes you need to put away your principles and do what’s right.”) Plus some regulatory statutes explicitly require the regulator to make service ”affordable.” (as it is the situation, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Listed here are 3 ways, in keeping with economic efficiency, for regulators to handle affordability. Help the reduce usage that is unlucky. Regulators can advocate for affordability by pressing for policies which make consumption less costly, like improved housing stock, ”orbs” that signal high prices, and efficient lighting and appliances. Analogy: Doctors save lives not just by treating gunshot wounds, but by advocating for gun safety. (American Academy of Pediatrics: ”The lack of guns from children’s homes and communities is one of reliable and measure that is effective prevent firearm-related injuries. ”) Interpret ”affordability” as long-term affordability. Getting prices right and preventing overconsumption, even in the event it does increase prices into the short run, reduces total costs into the long term. Expose the dark side of under-pricing. Rather than follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: in regards to the real costs of utility service, the issue of overconsumption, the error of under-pricing. Making use of their credibility rooted in expertise, regulators can pressure legislators to act on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these lead to higher incomes, so that citizens are able utility service priced properly.
Using the nation’s economy stressed, politicians are pressuring regulators to produce utility service ”affordable.” This picture has three problems.
Wealth Redistribution is Not Regulation’s Department
Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to pay for those costs, then designs rates to create the revenue requirement. (mer…)