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. (more…)