Is Good Utility Regulation in Jeopardy?

Deck: 

Balance and Adaptability are Critical

Balance and Adaptability are Critical

Fortnightly Magazine - April 2017
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The three mortal sins of utility regulation are ideology, ignorance and inertia (the three I's). Acting on political beliefs, inadequate information, and past conditions that no longer exist is a recipe for poor regulation. It ensures that regulators will not be able to advance the public interest. 

Poor regulatory performance comes from inappropriate action or unreasonable inaction.

Taking a laissez-faire position on an issue that requires regulatory intervention illustrates the latter problem. Inappropriate action can arise from poor information or willful neglect by the regulatory agency that is commissioned to serve the public.  Regulators must serve the public, not narrow interests.

Regulatory failure, a term that is often used, would then be the sum of actions and failures to act, which leads to an undesirable outcome. More precisely, it's a performance that falls short of what the general public expects.

Two Hallmarks of Good Regulation

Balancing legitimate interests: Good regulation makes for well-informed decisions directed at the public interest. It strives for balance and justice. Specifically, good regulation weighs legitimate interests and makes decisions based on facts.

Good regulators do not unduly favor any one interest group over the public interest. The law and the evidentiary record should support those decisions.

Good regulation tries to avoid excessive politicization. Those weaken regulation as an institution and instrument of public policy. Politically expedient decisions tend to disrupt the agency's commitment to fostering the long-term interest of the state.

Through the years, I have observed more and more political posturing by regulators. At the extremes, I have seen regulators acting as if utilities cannot do much wrong or much right. I have also seen regulators taxing utility customers by increasing their rates to advance the agenda of politically influential interest groups, some of which have become new stakeholders in the regulatory arena.

Ideology threatens balanced judgment, which has been the hallmark of good regulation for many decades. Political pressures from both governors and state legislatures have become more intense in recent years.

Within the regulatory agencies themselves, emphasis on special interest demands has escalated to squeeze out public interest goals. Commissioners and managers are the guilty parties here, whether their political leanings are on the left or the right. 

Adaptability to new conditions: A regulatory agency can adapt its practices to fulfill its obligations in a world of changing utility industries, economics, and public policy. In challenging times, any successful institution must be open to new ideas and new practices.

Otherwise, the institution risks becoming an anachronism and loses the ability to achieve its goals. In a dynamic world, good regulatory agencies must evaluate their existing practices for ratemaking and determining the scope of utility functions and obligations.

For example, old interconnection and pricing rules may unduly restrict customers who want to self-generate because of changed economics.

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