Using the nation’s economy stressed, politicians are pressuring regulators to make utility service “affordable.” This picture has three problems.
Wealth Redistribution is Not Regulation’s Department
Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement. Rate design makes each customer category bear the expense it causes. None of those steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes one factor only we lower rates for the unfortunate by raising rates for eliteessaywriters.com prices others if we jigger the numbers—if. Achieving affordability through rate design means cost that is compromising to redistribute wealth. It resembles taxation of one class to benefit another, using this exception: With taxation, citizens can retire representatives whose votes offend; but 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 different ways: by “taxing” shareholders, i.e., 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 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 important to a fair society. Poverty is intolerable and private charity never suffices, so government steps in. But helping the luckless should be done by political leaders, who must justify their actions to the electorate; not by professional regulators, whose focus should be industry performance.
Affordability of any product—groceries, a Lexus, or utility service—depends using one’s income and wealth, 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 perhaps we lowered their price of housing, health care, transportation, or education. But these initiatives are outside regulators’ authority. To make regulators in charge of affordability is illogical.
Cheap Energy is politics that are cheap
Politicians who argue for affordability use the easy road. To legislate economic development, greenness, reliability, energy independence, and technology leadership, all efforts that increase costs, while commanding the regulator which will make service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics.
When politicians call for “lower rates,” the electorate feels entitled to receive instead of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is “take” instead of “give.” So when lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, because 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 is found the explanation for our obesity epidemic: low food prices. Studying 40 years of data, he spotted both causation and correlation between girth growth and value declines. He traced these trends to government farm policy shifts (from paying for non-production to stimulating full production) and technology boosts (which lowered production costs). The low the cost, the more production; the greater amount of production, the more (fast) food; the greater food, the more calories available; the greater amount of calories available, the greater 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 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).
So what does food have to do with “affordable” utility service? A regulator’s job would be to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability just isn’t a variable. To create service affordable into the unlucky, the commission will have 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 more than the advantages. Conversely, economic inefficiency exists once we forego some action that, if taken, could make someone better off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to leave a benefit on the table, 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: Just 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 back, “Sometimes you have to put aside your principles and do what’s right.”) And some regulatory statutes explicitly require the regulator to help make service “affordable.” (as it is the scenario, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Here are three ways, in line with economic efficiency, for regulators to handle affordability.
Help the unlucky reduce usage. Regulators can advocate for affordability by pressing for policies that produce consumption less costly, like improved housing stock, “orbs” that signal high prices, and efficient lighting and appliances. Analogy: Doctors save lives not just 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 effective measure to prevent firearm-related injuries. “)
Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, just because it increases prices into the short run, reduces total costs into the long run.
Expose the dark side of under-pricing. As opposed to follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: concerning the real costs of utility service, the issue of overconsumption, the error of under-pricing. Making use of 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, in order that citizens are able to afford utility service priced properly.