Aided by the nation’s economy stressed, politicians are pressuring regulators which will make utility service “affordable.” This picture has three problems.
Wealth Redistribution just isn’t Regulation’s Department
The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. 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 if 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. Continue reading ““Affordable” Utility Service: What is Regulation’s Role? Aided by the nation’s economy stressed, politicians are pressuring regulators which will make utility service “affordable.” This picture has three problems. Wealth Redistribution just isn’t Regulation’s Department The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. 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 if 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 profit another, with this particular exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck using the rates regulators set. As opposed to shifting costs between customer classes, regulators might redistribute wealth in different ways: by “taxing” shareholders, i.e., reducing shareholder returns below the otherwise appropriate level. But taxing shareholders is no more the regulator’s domain than is taxing some other clients. And it’s 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 ought to be done by political leaders, who must justify their actions to your electorate; not by professional regulators, whose focus should be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on one’s income and wealth, and on the cost of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if we lowered their cost of housing, medical care, transportation, or education. However these initiatives are outside regulators’ authority. Which will make regulators responsible for affordability is illogical. Cheap Energy is politics that are cheap Politicians who argue for affordability take the easy road. To legislate economic development, greenness, reliability, energy independence, and technology leadership, all efforts that increase costs, while commanding the regulator to produce service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics. When politicians call for “lower rates,” the electorate feels entitled to receive in place 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.” As soon as lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, because they question their ability to differentiate pander from policy. They are the 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 many years of data, he spotted both correlation and causation between girth growth and cost declines. He traced these trends to government farm policy shifts (from spending money on non-production to stimulating production that is full and technology boosts (which lowered production costs). The reduced the cost, the more production; the more production, the more (fast) food; the greater amount of food, the greater amount of calories available; the more calories available, the greater calories consumed. See C. Dreifus, “A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). We have been 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 want to do with “affordable” utility service? A regulator’s job is to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is not a variable. Which will make service affordable towards 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 further action can create benefits without increasing costs by significantly more than the advantages. Conversely, economic inefficiency exists once we forego some action that, if taken, can make someone better off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to go out of an advantage up for grabs, 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 never be credible. Regulators, being part of government, have to help. (A commission staff chief told me 25 years ago, “Sometimes you have to put aside your principles and do what’s right.”) And some statutes that are regulatory require the regulator in order to make service “affordable.” (As is the truth, I am told, in Vanuatu, an 83-island nation in the South Pacific.) Listed here are three straight ways, consistent with economic efficiency, for regulators to deal with affordability. Help the unlucky reduce usage. Regulators can advocate for affordability by pressing for policies that produce consumption less costly, like improved housing stock, “orbs” that signal high prices, and efficient lighting and appliances. Analogy: Doctors save lives not merely 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, whether or not it increases prices within the short run, reduces total costs into the long term. Expose the side that is dark of. 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 income-raising policies. Better education, housing, and health care—all these lead to higher incomes, to ensure citizens are able utility service priced properly.”