“Affordable” Utility Service: What is Regulation’s Role? With all the nation’s economy stressed, politicians are pressuring regulators to help make utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly not Regulation’s Department Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to pay for those costs, then designs rates to produce the revenue requirement. Rate design makes each customer category bear the costs it causes. None among these cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes one factor only when we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for other people. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of 1 class to profit another, using this exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck because of the rates regulators set. Rather than 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’s likely unconstitutional: Having invested to serve the 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 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 income and wealth, as well as 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. But these initiatives are outside regulators’ authority. To produce regulators responsible for affordability is illogical. Cheap Energy is politics that are cheap 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 in the place of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is “take” in the place of “give.” And when lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, because they question their ability to tell apart 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 several 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 paying for non-production to stimulating full production) and technology boosts (which lowered production costs). The lower the fee, the more production; the greater amount of production, the greater (fast) food; the more food, the greater amount of calories available; the greater amount of calories available, the more calories consumed. See C. Dreifus, “A Mathematical Challenge to Obesity,” The New York Times (May 14, 2012). We have been 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 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 would need 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 significantly more than the advantages. Conversely, economic inefficiency exists whenever 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 go out of a benefit on the table, makes everyone worse off. Underpricing in the 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 will never be credible. Regulators, being section of government, have to help. (A commission staff chief told me 25 years back, “Sometimes you need to put away your principles and do what’s right.”) And some statutes that are regulatory require the regulator which will make service “affordable.” (As is the truth, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Listed here are three straight ways, consistent with economic efficiency, for regulators to handle 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 one of reliable and effective measure to prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, just because it does increase prices within the short run, reduces total costs into the run that is long. Expose the side that is dark of. 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 issue of overconsumption, the error of under-pricing. Using their credibility rooted in expertise, regulators can pressure legislators to act on affordability directly by enacting income-raising policies. Better education, housing, and health care—all these result in higher incomes, so that citizens are able to afford utility service priced properly.

“Affordable” Utility Service: What is Regulation’s Role? With all the nation’s economy stressed, politicians are pressuring regulators to help make utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly not Regulation’s Department Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to pay […]

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