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Creating the Perfect Regulator

Regulatory complexities call for supernatural skills

Fortnightly Magazine - November 2007

good regulator isn’t all about intelligent policy. Sometimes it’s about making the best of a bad situation. Like judges’ rulings, regulators’ decisions are only as good as their underlying statutory laws and policies (see “Virginia: Restructuring Rollback ”).

The best regulators in the world can’t make up for a misguided legal framework. But good regulators work within the existing construct to find an acceptable outcome. They figure out how to avoid splitting any babies.

#3: Clairvoyance

The regulatory ideal gets complicated because regulators’ decisions can have far-reaching results (see “Omniscience” above) and unintended consequences. Good regulators understand this, and they compensate by considering each decision in its appropriate economic and political context. Good regulators take a long-term perspective on issues that lesser regulators might view myopically.

In Thenmadathil’s home state, two of three PUC commissioners voted recently to deny a request by utilities to pre-approve plans to build the 950-MW Red Rock power plant. The regulators understood the coal-fired project’s importance for Oklahoma utilities. But they looked ahead to the days when $1.8 billion in cost-recovery would begin hitting ratepayers’ electric bills, and foresaw pointed questions about the lack of a competitive solicitation, or indeed any serious consideration of options aside from gas- or coal-fired power capacity.*

“A ‘self-build plant,’ without the benefit of a more open, transparent competitive bid process, could/should also mean self-finance,” stated Commissioner Jim Roth. “And that self-finance would of course be subject to future scrutiny of the utility’s prudence.”

#4: Righteousness

Pontificating aside, the specific reference to “good regulators” in the September issue of Fortnightly probably referred to those who make sure regulated utilities can access affordable public capital. Good regulatory decisions support strong credit ratings and reward utilities for investing in assets that ensure affordable and reliable energy supplies over the long term.

At the same time, however, good regulators also must ensure utilities don’t build gold-plated plants at ratepayers’ expense.

Strong credit ratings help to minimize capital costs, which is good for ratepayers and investors alike. But good regulators know how to strike the right balance of burdens and rewards—how to invest ratepayers in utility-resource decisions; and how to compensate utility investors for the real risks they take.

Of course, regulators are human beings, encumbered with biases and blind spots. Good regulators understand their foibles, and work conscientiously to transcend them. They try to be as knowledgeable, wise and forward-thinking as possible, but at the end of the day they rely on the strength of their convictions—particularly when communicating with stakeholders and lawmakers. Good regulators speak truth to power, unflinchingly but diplomatically.

Simply put, good regulators take the high road. They take a big-picture perspective on the utility compact and the public trust. And they do the right thing, even when it’s economically difficult or politically dangerous.

For such commissioners as these, regulatory heaven awaits.