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“Affordable” Utility Service: What is Regulation’s Role? Aided by the nation’s economy stressed, politicians are pressuring regulators which will make utility service “affordable.” This picture has three problems. Wealth Redistribution just isn’t 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 a factor only we lower rates for the unfortunate by raising rates for others if we jigger the numbers—if. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of just one class to benefit another, with this particular exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck with the rates regulators set. As opposed to shifting costs between customer classes, regulators might redistribute wealth in another way: by “taxing” shareholders, for example., reducing shareholder returns underneath the otherwise level that is appropriate. But taxing shareholders is no more the regulator’s domain than is taxing some other clients. And it’s really 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 vital 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 into the electorate; not by professional regulators, whose focus must be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on a single’s wealth and income, and on the price of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if we lowered their price of housing, health care, transportation, or education. However these initiatives are outside regulators’ authority. To create regulators responsible for affordability is illogical. Cheap Energy is Cheap Politics Politicians who argue for affordability take 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 get in the place of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is “take” in place of “give.” And when lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, while they question their capability to tell apart pander from policy. They are the total results when politicians avoid their responsibility for affordability. “Affordability” Undermines Regulation’s Responsibility Mathematician Carson Chow says he’s found the reason for our obesity epidemic: low food prices. Studying 40 several years of data, he spotted both correlation and causation between girth growth and value 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 low the fee, the more production; the more production, the more (fast) food; the greater amount of food, the greater amount of calories available; the greater amount of calories available, the greater amount of calories consumed. See C. Dreifus, “A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). We are both over-consuming and under-appreciating: Dr. Chow unearthed 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. In order to make service affordable to your unlucky, the commission would have to lower the cost 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 advantages. Conversely, economic inefficiency exists as soon as we forego some action that, if taken, will make someone better off without making anyone worse off. To over-consume, to waste, to act inefficiently, to leave good results up for grabs, makes everyone worse off. Underpricing in 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 not be credible. Regulators, being part of government, have to help. (A commission staff chief told me 25 years ago, “Sometimes you need to put aside your principles and do what’s right.”) And some regulatory statutes explicitly require the regulator which will make service “affordable.” (As is the outcome, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Listed below are three straight ways, in line with economic efficiency, for regulators to handle affordability. Help the reduce usage that is unlucky. Regulators can advocate for affordability by pressing for policies that make consumption less costly, like improved housing stock, “orbs” that signal high prices, and lighting that is efficient appliances. Analogy: Doctors save lives not just by treating gunshot wounds, but by advocating for gun safety. (American Academy of Pediatrics: “The lack of guns from children’s homes and communities is one of reliable and effective measure to prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, even though it increases prices when you look at the short run, reduces total costs into the run that is long. Expose the side that is dark of. As opposed to follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: about the real costs of utility service, the situation of overconsumption, the error of under-pricing. Due to their credibility rooted in expertise, regulators can pressure legislators to do something on affordability directly by enacting income-raising policies. Better education, housing, and health care—all these result in higher incomes, making sure that citizens are able to afford utility service priced properly.
“Affordable” Utility Service: What is Regulation’s Role? Aided by the nation’s economy stressed, politicians are pressuring regulators which will make utility service “affordable.” This picture has three problems. Wealth Redistribution just isn’t Regulation’s Department The regulator identifies prudent costs, computes Read More