WHEN 42 PUBLIC UTILITY COMMISSIONERS HUDDLED in private recently at the Brown Palace Hotel in Denver to discuss their roles come 2003, they came to a striking conclusion: Someday they might be out of business. Some said it would take five years, others said as long as 10.
"There was quite a bit of discussion and interest in commissions actually formulating what they call an 'exit plan,' by which they meant, in a kind of systematic way ... being prepared to wind back on their regulatory oversight," says Douglas N. Jones, director of the National Regulatory Research Institute, co-sponsor of the Commissioners Summit. "I'd not heard that before. And I've been in [regulation] 38 years."
"I think it is a reasonable goal to work ourselves out of a job, over some period," agrees R. Brent Alderfer of the Colorado Public Utilities Commission, a summit attendee. "We're now the B-52 of utility regulation ... it's time to trade it in for the B-1, or something a little more flexible."
The conclusions of members from 28 commissions, reported by a half-dozen attendees interviewed after the gathering, were a fitting adjunct to an NRRI report that served as the summit primer. Called Organizational Transformation: Ensuring the Relevance of Public Utility Commissions, the white paper captures conclusions of a similar 1995 get-together, also sponsored by NRRI and the National Association of Regulatory Utility Commissioners.
The report confirms that commissions must change their culture, staffing and skills to ready for deregulated utility markets. They must prepare for a world where there are no more rate cases. Commissions must transform the public into educated consumers while also assessing their own performance as public bodies.
Examing Skills and Culture
Other findings of the report and the "commissioners only" summit reveal that PUCs will have to:
Face down civil service restrictions while restructuring staff to handle market demands. Commissioners have found they need more economists and marketers and fewer attorneys. But it's tough to replace staff when an estimated 75 percent of a 11,116 combined state commission workforce are civil servants. As the NRRI report notes, decades-old staff attitudes must be overcome to "smooth the path from a placid tribal existence to one of flux and healthy turmoil." Commissioners will have to lead the "tribe" while maintaining morale, which generally isn't good.
Develop "guest relations" attitudes. Borrowing a term from the hotel industry, commissions, in developing new consumer roles of education, must treat ratepayers as cherished customers. As they do this, commissions will need to avoid turf struggles with other consumer agencies. Commissioners will need to reach out more to legislators and the press. They'll need to deal with sister agencies in state government, such as economic development and tax departments. This communication will be especially vital as legislators envision commissions "replaced" by competition and as PUC budgets become targets.
Encourage cooperation between states. Commissioners at the summit, however, stopped short of ceding to regional regulation.
Take on new functions, such as alternative dispute resolution. Commissions will have to meet more frequently with utilities to resolve issues before those issues land in a hearing room. Rate-based regulation will be history. Long, hard looks at commission functions will prompt the taking on of new duties. About 40 commissions have been, or are being, reorganized, according to the NRRI.
One of the most important changes acknowledged both in the report and at the summit was the change of culture and skill-mix, within commissions and staff, Jones says.
Commissioners feel they have much work ahead to change staff culture.
Changing culture is especially difficult because the center of commissions is an adjudicatory process, and commission ceremonies center around public hearings. The NRRI report notes: "One symbol is the different colored badges worn at NARUC meetings ... which communicate both a distinction between the regulated and the regulators and variations in rank within the commissions. The badges are one expression of the differing social status within the regulatory tribe."
Other roadblocks include "beliefs about human nature and activity." They "vary among commissioners partly by political affiliation and the accompanying orientation towards government. Among staff, there may be less variation and more inclination to take a jaundiced view of the effectiveness of the social contract between utilities and ratepayers.
"They may see utilities as powerful local Goliaths rather than global competitors," according to the report. "They may see no way to be accountable to the public except through exquisitely detailed procedure."
What are the solutions to these problems? Jones admits the summit was light on strategies and that there was only recognition that these problems need to be faced. Commissioners will push to address them.
Some commissions already are. NRRI in the past 18 months has visited 17 commissions to be "honest brokers and family to help the staff and commissioners get closer together," Jones says. "To see what the obstacles are, see how culture needs to change, to see what resistance there is.
"I don't want to suggest it's chewing at the fat," the NRRI director says. "It's they have tried to, in a fairly orderly way, get facilitators ... to help the staff."
NRRI has worked with the Iowa Utilities Board to invent a new organizational structure. With the Washington Utilities and Transportation Commission, it identified how everyone at the commission communicates, how they should communicate, and how they can learn together before they determine the changes needed.
Paula S. Dierenfeld of the Iowa Utilities Board, a summit attendee, says the process of creating a new structure goes beyond mechanics; it examines skills and culture. For her board's staff of 75, most with 12 to 30 years tenure, the process began over a year ago.
"There are some in our staff who believe competition is not here to stay," Dierenfeld says. "It's kind of a trendy thing to do right now. They've been around for 20 years and they don't see a need for change. And they figure if they wait around long enough, this will pass."
During planning, the Iowa board broke into three teams -- one to look at structural changes, one to look at skill changes and the last to look at cultural changes. The board is facing up to structural changes first, interviewing and selecting top-line management.
The "culturalization" process will be more difficult, the commissioner admits.
"We have to play within the rules that are established by our department of personnel, so we recognize there are some limitations on things we can do," she says. "There's a recognition by staff that there's going to be changes.
"It has created anxiety among the staff. It's also created some excitement. It's suggesting to staff there are some new opportunities there. Again, many of these people have been around for a long time and they've kind of become stagnant in some of their positions."
Does the process help smooth the path from tribal existence to healthy turmoil?
"There's a lot of turmoil to it," the commissioner admits. "I don't know how healthy some people think it is at this point...everybody sees it, if they're honest with themselves, they really do see that it's in our best interests."
Reconnecting the Lines
As far as commissioners' roles changing, Dierenfeld sees the need to communicate more regularly with legislators, to educate them like consumers. She says elected leaders need to know that parts of the industry, in the short term, will stay monopolies, and therefore, will need to be regulated. Yet, she has been told she will "probably never see a rate case."
Education of legislators will take time. In the most recent Iowa legislative session, Republican Senator Mary A. Lundby proposed Amendment 5603 to cut the board's $5.6 million annual budget by $150,000. According to the commissioner, the senator claimed that because competition was coming, cutbacks could begin this year, and eventually the budget could be eliminated entirely. The senator later withdrew her amendment, but "it was kind of a wake up call for us," Diernefeld says. "It got our attention. Again, it just reinforced that we need to do a better job communicating."
"If [commissioners] take the stance 'we're above it all,' then they realize they'll be done in, because there are other players ... not just the utilities, that are certainly active in legislature on this subject," Jones adds.
Susan M. Seltsam of the 200-employee Kansas Corporation Commission says communication must begin at the staff level.
Even the NRRI write paper notes, "Staff who are resistant to change may be those best protected by civil service and can safely ignore the 'short timers' until they go away. Commissions, with their highly judicialized processes may be even more resistant to change than other types of public organizations. Ex parte requirements, for example, inhibit commissioners attempting to communicate and reinforce a culture of change."
Seltsam relates her commission's own ex parte problem. One incident more than three years ago brought grousing from parties who thought they didn't get favorable decisions, partly because attorney advocates for the consumer also were advising the commission on its decision.
"They felt like attorneys and staff technical people had too much influence with the commission," Seltsam says. "They had taken a particular position in the hearing ... and it was a problem with us to try to get an independent evaluation -- someone who hadn't litigated the case. ... The commission did not adopt the staff position. But some of the parties felt when the order was written ... it was not as well balanced as it should have been."
Under ex parte rules in Kansas, technical staff aren't prevented from open discussion with the commission; legal staff is. Now, to avoid these problems, a small staff of attorneys advise the commission only, and there's no worry of dual commission-advocacy roles.
Alderfer, of the Colorado PUC, says his 90-employee commission, all civil servants, has been wrestling with how to free up time from adjudicatory and rate-making cases. These cases could easily take all the staff's time, but the commission needs to look at setting policies in the electric and telecommunications markets.
The Colorado PUC has an ongoing task force that will look for ways to shift to an effective policymaking model.
For employees, Alderfer admits "healthy turmoil is uncomfortable for folks who have done the job effectively for a long time one way."
"In preparation of a case, in the thinking and in the options presented to the commissioners, the staff needs to address a new range of options, so it needs to begin the thinking of what kind of public interest considerations are there if the utility can set its prices wherever it wants within a band," he says. "It takes a new kind of thinking, rather than, 'Let's give them a 9 percent rate of return.'"
Defining a Market Rate
James J. Malachowski of the Rhode Island Public Utilities Commission, who also was at the summit, says his small commission of 11 employees is making changes slowly. It does so through attrition and through adjustments to market factors.
"The new entrants are being regulated entirely differently," he says. "We've attempted to keep the hurdle for entry very low. We ask them to file a statement of business operations just basically so we know who they are and where to get a hold of them...and what kind of business line they're in. Yes, we look at whether they're capitalized, but it's not a type of extensive review that has taken place in the past."
The commission doesn't require financial reports, does not look at profit levels, and it sets no price caps or other regulatory schemes.
Only when there's a complaint does the Rhode Island commission examine quality-of-service issues. Incumbents file extensive monthly quality-of-service reports, something other commissioners and Jones says is a trend: more attention will be paid to service quality and less to financial issues as markets deregulate. Why? There will be more opportunities for companies to abuse service quality issues.
Malachowski says three areas where the changing commission mission is affecting expertise in staffing is in arbitrating competitor differences, in consumer education, and in how commissioners look at markets.
On the second point, he notes, "I have good accountants here. Do they really know anything about marketing? Do they know anything about sophisticated consumer preference tools? Surveys? Focus groups? If we're supposed to be informing and educating consumers shouldn't we be starting on the front end?"
Bob Rowe of the Montana Public Service Commission agrees commissioners need to better define their market role.
"One of the things the NRRI report emphasizes, and I think is correct, is the importance of marketing," Rowe says. "Very few of us really understand marketing or market segmentation...getting consumer information out to customers at the time that they need it, at the time they're making their decision."
Regarding markets, Malachowski, says commissions' approach has to be different. The old question of where is the risk and who should carry it -- ratepayers or shareholders -- must be looked at differently, he says.
"That was always the taffy pull," he says. "I'll still continue to do that. But the new function I have now ... one of the criteria is, 'How will that affect the markets?'"
And yet, he asks, what does he know about markets?
He believes commissioners need to be more open minded on market issues. As an example, he cites withholding power from the New England grid. Regulators don't want generators to withhold power in attempts to affect the spot price. But generators that have long-term contracts for gas play the gas resale market. If they see the gas market as an attractive way to make money, they're resell the gas, rather than putting it in generators to make electricity, the commissioner says. And allowing this practice, called tolling, is an entirely appropriate decision for free market entrepreneurs.
"What it has to do with [commissioner] skills, is I think it epitomizes the knee-jerk reaction from regulators ... 'People are dumping gas, that's a problem, let's write a rule, let's put language on paper that's very tight ... so we can control, regulate the market.' It runs to skills ... because people can't take that knee-jerk command and control reaction. They have to be thinking about this differently. They have to be thinking about the markets."
Judith A. Jones of the Ohio Public Utilities Commission, a former city council member for 10 years, brings a unique perspective to commission restructuring. She minces no words.
"We need to get government out of the way," she says. "We should be looking at an exit plan for much of this. Not all. I think there's some natural monopolies within the utilities industries that will need to be regulated."
Her 370-employee commission recently wrapped up focus groups within all the departments and held a three-day conference at the end of May for staff, commissioners and industry representatives to examine "where we are, where we want to go, where we should go."
Like some other commissions, Ohio doesn't have rate cases. "Right now, what staff's doing ... in telecom is working on alternative regulation plans," Judith Jones says. "Most of the rates are frozen as we go to competition."
Staff, she says, is apprehensive of what deregulating industries will bring inside the commission.
"I think everyone realizes there's change and there is, unfortunately, a fear about their jobs," says the commissioner. And that includes layoffs, "Yes, or even changing. Of course, part of what we're talking about is retraining or having people have multiple skills so they're flexible. I think we're also talking about more interaction among departments.
"In my view, that ought to make it a more interesting job for everybody. But sometimes people fear change."
Joseph F. Schuler is senior associate editor at Public Utilities Fortnightly.
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