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Creating the Perfect Regulator

Regulatory complexities call for supernatural skills

Fortnightly Magazine - November 2007

Jason Thenmadathil, a regulatory analyst with the Oklahoma Corporation Commission, sent a letter to Public Utilities Fortnightly recently. He asked, “How would you define a ‘good regulator’? How do you separate the good regulators from the bad ones?”

Thenmadathil’s question didn’t just come out of the blue. Specifically, he was seeking clarification of a passage from the September 2007 issue (“Sub-Primed and Ready ”), in which a Baird analyst recommended “investors focus on utility investments with good regulators, solid business strategies and management that can execute those strategies.”

The simplicity of Thenmadathil’s question, however, belies the impossibility of a good answer—and indeed, the ambiguity of the term “good.”

We picked some excellent regulators for this year’s “ Regulators Forum ” feature story. But just as beauty is in the eye of the beholder, “good” is a subjective idea, entirely dependent on one’s perspectives and interests. Ultimately, that’s the whole point, as it pertains to the job of a utility regulator.

But to answer the question directly, a regulator’s “goodness” is defined by four fundamental traits: Omniscience; Solomonic Wisdom; Clairvoyance; and Righteousness.

#1: Omniscience

If heaven exists, surely it includes a special place for PUC commissioners and staffers.

Their jobs rank among the most difficult—and most thankless—in American government today. PUC commissioners must grapple with complex issues that directly affect the budgets of American consumers and businesses—and those issues appear across a bewildering range of regulated industries.

For example, a recent day in the life of a randomly selected PUC (Pennsylvania, in this case) included new filings involving a trucking company’s liability insurance; a zoning dispute for a cable-TV equipment installation; billing complaints by natural-gas customers; and a telecom company’s affiliate-financing arrangement.

Thus the first trait of the “good” regulator is the ability to comprehend an enormous variety of legal and administrative subjects.

Not every commissioner can bring equal expertise on bus routes, water rates and power-company credit ratings. (That’s what staff members and special committees are for.) Nevertheless, regulated companies and their customers demand regulators comprehend the nuances of multifaceted and politically sensitive issues. The good regulator is a quick study with a subtle mind.

#2: Solomonic Wisdom

A good regulatory decision results in the most legally correct and socially beneficial outcome for all stakeholders. In this respect, a good regulator is akin to a good judge.

A good regulator strives to understand all the relevant facts in a case, including the interests and burdens of the various stakeholders. Then the regulator renders a decision that balances the scales of justice as efficiently and fairly as possible, in accord with the greater good and the applicable laws.

Regulators in Missouri and Kansas, for example, educated themselves sufficiently about some decidedly convoluted accounting and tax structures to approve a cost-recovery model that protects investors and ratepayers alike from financial risks in the Iatan 2 coal-fired power project (see “ Iatan 2: A New Coal Model ”).

But being a

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