With 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 expenses it causes. None of these cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes one 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 cost that is compromising to redistribute wealth. It resembles taxation of one class to profit another, with this particular exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck with all the rates regulators set.
In place of shifting costs between customer classes, regulators might redistribute wealth in a different 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 public, shareholders expect “just compensation,” undiminished by a forced contribution for affordability.
Moving money among citizens is essential to a society that is fair. Poverty is intolerable and private charity never suffices, so government steps in. But helping the luckless ought to be done by political leaders, who must justify their actions towards the electorate; not by professional regulators, whose focus needs to be industry performance.
Affordability of any product—groceries, a Lexus, or utility service—depends on one’s wealth and income, as well as on the expense of other products. The poor could better afford utility service if we raised their income and increased their wealth. Or if perhaps we lowered their cost of housing, health care, transportation, or education. However these initiatives are outside regulators’ authority. To produce regulators in charge of affordability is illogical.
Cheap Energy is Cheap Politics
Politicians who argue for affordability make 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 as opposed to encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” in place of “give.” As soon as lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, while they question their ability to differentiate 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 cause of our obesity epidemic: low food prices. Studying 40 years of data, he spotted both causation and correlation between girth growth and cost declines. He traced these trends to government farm policy shifts (from investing in non-production to stimulating production that is full and technology boosts (which lowered production costs). The reduced the price, the more production; the greater amount of production, the greater (fast) food; the greater amount of food, the greater amount of calories available; the greater 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).
So what does food need to do with “affordable” utility service? A regulator’s job is to regulate—to performance that is establish, then align compensation with compliance. In this equation, affordability is not a variable. In order to make service affordable into the unlucky, the commission would need to lower the purchase 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 significantly more than the huge benefits. Conversely, economic inefficiency exists whenever we forego some action that, if taken, could make someone best off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to leave good results on the table, makes everyone worse off. Underpricing when you look paper writers for college 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 section of government, have to help. (A commission staff chief told me 25 years ago, “Sometimes you must put away your principles and do what’s right.”) Plus some statutes that are regulatory require the regulator to create service “affordable.” (as it is the situation, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Here are 3 ways, in line with economic efficiency, for regulators to address affordability.
Assist the unlucky reduce usage. Regulators can advocate for affordability by pressing for policies that make consumption less costly, like improved housing stock, “orbs” that signal high prices, and efficient lighting and appliances. Analogy: Doctors save lives not merely 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 the most reliable and effective measure to prevent firearm-related injuries. “)
Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, even when it does increase prices into the short run, reduces total costs when you look at the run that is long.
Expose the dark side of under-pricing. Rather than follow politicians along 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 issue of overconsumption, the error of under-pricing. Along with 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, in order for citizens are able to afford utility service priced properly.