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 cover those costs, then designs rates to make the revenue requirement. Rate design makes each customer category bear the expense it causes. None of these cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only when we jigger the numbers—if we lower rates for the unfortunate by raising rates for others. Achieving affordability through rate design means cost that is compromising to redistribute wealth. It resembles taxation of 1 class to profit another, with this specific exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck because of the rates regulators set.
In the 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 level that is appropriate. But taxing shareholders is no more the regulator’s domain than is taxing other customers. 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 essential 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 income and wealth, as well as on the price of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if perhaps we lowered their cost of housing, health care, transportation, or education. However these initiatives are outside regulators’ authority. In order to make regulators responsible for affordability is illogical.
Cheap Energy is politics that are cheap
Politicians who argue for affordability take the road that is easy. 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 get in the place of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” instead of “give.” So when lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, as they question their capability to tell apart pander from policy. These are the results when politicians avoid their responsibility for affordability.
“Affordability” Undermines Regulation’s Responsibility
Mathematician Carson Chow says he’s found the explanation for our obesity epidemic: low food prices. Studying 40 several years of data, he spotted both correlation and causation between girth growth and value 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 low the cost, the greater production; the greater production, the greater (fast) food; the greater food, the greater amount of calories available; the greater amount of calories available, the more 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).
What does food have to do with “affordable” utility service? A regulator’s job is to regulate—to performance that is establish, then align compensation with compliance. In this equation, affordability just isn’t a variable. In order to make service affordable to the unlucky, the commission would have to lower the cost 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 benefits. 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 behave inefficiently, to leave a benefit 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 Proper Roles for Regulators
Unless essential services are affordable, government will never be credible. Regulators, being section 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 regulatory statutes explicitly require the regulator to produce service “affordable.” (As is the way it is, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Here are three straight ways, in line with economic efficiency, for regulators to deal with affordability.
Assist ninjaessays sign up the reduce usage that is unlucky. Regulators can advocate for affordability by pressing for policies that produce consumption less costly, like improved housing stock, “orbs” that signal high prices, and lighting that is efficient 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 effective measure to prevent firearm-related injuries. “)
Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, just because it raises prices within the short run, reduces total costs in the long haul.
Expose the side that is dark of. As opposed to follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: concerning the real costs of utility service, the issue of overconsumption, the error of under-pricing. Along with their credibility rooted in expertise, regulators can pressure legislators to behave on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these lead to higher incomes, to ensure citizens are able utility service priced properly.