Aided by the nation’s economy stressed, politicians are pressuring regulators in order to make utility service “affordable.” This picture has three problems.
Wealth Redistribution just isn’t 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 make the revenue requirement. Continue reading ““Affordable” Utility Service: What Exactly Is Regulation’s Role? Aided by the nation’s economy stressed, politicians are pressuring regulators in order to make utility service “affordable.” This picture has three problems. Wealth Redistribution just isn’t 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 make the revenue requirement. Rate design makes each customer category bear the costs it causes. None of those cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only we lower rates for the unfortunate by raising rates for others if we jigger the numbers—if. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of just one class to profit another, using this exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck because of the rates regulators set. As opposed to shifting costs between customer classes, regulators might redistribute wealth in different ways: by “taxing” shareholders, for example., reducing shareholder returns underneath the otherwise appropriate level. But taxing shareholders isn’t any more the regulator’s domain than is taxing other customers. 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 fair society. Poverty is intolerable and private charity never suffices, so government steps in. But helping the luckless should be done by political leaders, who must justify their actions towards the electorate; not by professional regulators, whose focus must be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on a single’s wealth and income, as well as on the cost of other products. The poor could better afford utility service if we raised their income and increased their wealth. Or if we lowered their price of housing, health care, transportation, or education. However these initiatives are outside regulators’ authority. To produce regulators accountable for affordability is illogical. Cheap Energy is Cheap Politics Politicians who argue for affordability make the easy road. All efforts that increase costs, while commanding the regulator to make service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics to legislate economic development, greenness, reliability, energy independence, and technology leadership. When politicians call for “lower rates,” the electorate feels entitled to get in place of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is “take” in place of “give.” As soon as lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, because they question their capability to differentiate 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 is 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 investing in non-production to stimulating full production) and technology boosts (which lowered production costs). The lower the fee, the greater amount of production; the greater amount of production, the more (fast) food; the greater food, the greater calories available; the greater amount of calories available, the greater amount of calories consumed. See C. Dreifus, “A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). We are 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). What does food need to do with “affordable” utility service? A regulator’s job would be to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is not a variable. To produce service affordable into the unlucky, the commission would have to lower the purchase 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 a lot more than the advantages. Conversely, economic inefficiency exists as soon as we forego some action that, if taken, could make someone best off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to leave a benefit on the table, makes everyone worse off. Underpricing in the name of affordability makes someone worse off, unnecessarily. How sensible is that? Actions for Affordability: Just The Right Roles for Regulators Unless essential services are affordable, government shall not be credible. Regulators, being element of government, need certainly 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 help make service “affordable.” (as it is the scenario, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Listed below are 3 ways, in line with economic efficiency, for regulators to deal with affordability. Help the unlucky reduce usage. 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 absence of guns from children’s homes and communities is considered the most reliable and measure that is effective prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, just because it does increase prices into the short run, reduces total costs into the run that is long. Expose the dark side of under-pricing. As opposed to follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: about the real costs of utility service, the issue of overconsumption, the error of under-pricing. Using their credibility rooted in expertise, regulators can pressure legislators to do something on affordability directly by enacting income-raising policies. Better education, housing, and health care—all these result in higher incomes, making sure that citizens are able to afford utility service priced properly.”