Creating the Perfect Regulator

Deck: 

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.

EES North America

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 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.