“Affordable” Utility Service: What Exactly Is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators in order to make utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly not Regulation’s Department The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. Rate design makes each customer category bear the expense it causes. None of these steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue only when we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for other individuals. Achieving affordability through rate design means cost that is compromising to redistribute wealth. It resembles taxation of one class to profit another, with this specific exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck because of the rates regulators set. In place of shifting costs between customer classes, regulators might redistribute wealth in another way: by “taxing” shareholders, i.e., reducing shareholder returns below the otherwise appropriate level. But taxing shareholders isn’t any more the regulator’s domain than is taxing some other clients. And it is likely unconstitutional: Having invested to serve the general public, shareholders expect “just compensation,” undiminished by a forced contribution for affordability. Moving money among citizens is really important to a society that is fair. Poverty is intolerable and charity that is private suffices, so government steps in. But helping the luckless ought to be done by political leaders, who must justify their actions to the electorate; not by professional regulators, whose focus must be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on one’s income and wealth, and on the expense of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if perhaps we lowered their price of housing, health care, transportation, or education. But these initiatives are outside regulators’ authority. To create regulators in charge of affordability is illogical. Cheap Energy is politics that are cheap Politicians who argue for affordability use the easy road. All efforts that increase costs, while commanding the regulator to make service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics to legislate economic development, greenness, reliability, energy independence, and technology leadership. When politicians call for “lower rates,” the electorate feels entitled to receive in place of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” in the place of “give.” And when lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, as they question their capability to differentiate pander from policy. These are the total results when politicians avoid their responsibility for affordability. “Affordability” Undermines Regulation’s Responsibility Mathematician Carson Chow says he’s found the cause of our obesity epidemic: low food prices. Studying 40 many years of data, he spotted both correlation and causation between girth growth and cost declines. He traced these trends to government farm policy shifts (from spending money on non-production to stimulating full production) and technology boosts (which lowered production costs). The lower the price, the greater production; the greater production, the greater (fast) food; the greater amount of food, the greater calories available; the greater calories available, the more calories consumed. See C. Dreifus, “A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). Our company is both over-consuming and under-appreciating: Dr. Chow found that “Americans are wasting food at a progressively increasing rate.” (Fairness point: Chow has his doubters. See Michael Moyer, “The Mathematician’s Obesity Fallacy,” Scientific American (May 15, 2012). What does food need to do with “affordable” utility service? A regulator’s job is to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is not a variable. To create service affordable to your unlucky, the commission would need to lower the price below cost. That leads to overconsumption, to Dr. Chow’s “waste.” This inefficiency hurts everyone. Economic efficiency exists when no further action can create benefits without increasing costs by a lot more than the benefits. Conversely, economic inefficiency exists as soon as we forego some action that, if taken, can make someone best off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to leave a benefit up for grabs, makes everyone worse off. Underpricing when you look at the true name of affordability makes someone worse off, unnecessarily. How sensible is that? Actions for Affordability: The Right Roles for Regulators Unless essential services are affordable, government shall never be credible. Regulators, being element of government, need to help. (A commission staff chief told me 25 years back, “Sometimes you need to put aside your principles and do what’s right.”) And some statutes that are regulatory require the regulator to make service “affordable.” (as it is the situation, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Listed below are three ways, consistent with economic efficiency, for regulators to handle affordability. Assist the unlucky reduce usage. Regulators can advocate for affordability by pressing for policies which make consumption less costly, like improved housing stock, “orbs” that signal high prices, and lighting that is efficient appliances. Analogy: Doctors save lives not only by treating gunshot wounds, but by advocating for gun safety. (American Academy of Pediatrics: “The absence of guns from children’s homes and communities is the most reliable and measure that is effective prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, no matter if it raises prices within the short run, reduces total costs when you look at the long run. Expose the dark side of under-pricing. Rather than follow politicians down the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: in regards to the real costs of utility service, the situation of overconsumption, the error of under-pricing. Using their credibility rooted in expertise, regulators can pressure legislators to act on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these result in higher incomes, to ensure that citizens are able to afford utility service priced properly.

“Affordable” Utility Service: What Exactly Is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators in order to make utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly not Regulation’s Department The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then …..
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