Because of the nation’s economy stressed, politicians are pressuring regulators which will 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 those steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes one factor only whenever we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for others. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of 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 because of the rates regulators set.
As opposed to shifting costs between customer classes, regulators might redistribute wealth in another way: by “taxing” shareholders, i.e., reducing shareholder returns below the otherwise level that is appropriate. But taxing shareholders isn’t any 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 should be done by political leaders, who must justify their actions to your 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 wealth and income, 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. However these initiatives are outside regulators’ authority. To produce regulators accountable for affordability is illogical.
Cheap Energy is Cheap Politics
Politicians who argue for affordability make the road that is easy. 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 society that is civil thrives if its key verb is “take” in place of “give.” As soon as lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, while they question their ability to distinguish pander from policy. They are the 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 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 production that is full and technology boosts (which lowered production costs). The reduced the price, the more production; the greater amount of production, the more (fast) food; the more food, the greater calories available; the greater amount of calories available, the greater calories consumed. http://essaywriters247.com 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 discovered 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 to your unlucky, the commission would have 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 action that is further create benefits without increasing costs by 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 do something inefficiently, to go out of an advantage on the table, makes everyone worse off. Underpricing in 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 never be credible. Regulators, being part of government, need certainly to help. (A commission staff chief told me 25 years back, “Sometimes you need to put away your principles and do what’s right.”) Plus some regulatory statutes explicitly require the regulator to help make service “affordable.” (As is the outcome, I am told, in Vanuatu, an 83-island nation in the South Pacific.) Here are 3 ways, consistent with economic efficiency, for regulators to address affordability.
Assist the reduce usage that is unlucky. 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 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, no matter if it does increase prices within the short run, reduces total costs within the long haul.
Expose the dark side of under-pricing. As opposed to follow politicians down 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. With their credibility rooted in expertise, regulators can pressure legislators to do something on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these result in higher incomes, so that citizens can afford utility service priced properly.