“Affordable” Utility Service: What Exactly Is Regulation’s Role? Using 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 Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to make the revenue requirement. Rate design makes each customer category bear the expense it causes. None among these cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes one factor only if we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for other individuals. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of one class to profit another, with this exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck because of the rates regulators set. In place of shifting costs between customer classes, regulators might redistribute wealth in different ways: by “taxing” shareholders, for example., reducing shareholder returns below the otherwise level that is appropriate. But taxing shareholders isn’t any more the regulator’s domain than is taxing other customers. 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 vital to a society that is fair. 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 your 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 wealth and income, and on the price 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 price of housing, medical care, transportation, or education. But these initiatives are outside regulators’ authority. To make regulators accountable for affordability is illogical. Cheap Energy is politics that are cheap Politicians who argue for affordability use 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 receive as opposed to encouraged to contribute. But no family, no congregation, no civil society, 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 capability to tell apart pander from policy. These are the 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 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 fee, the more production; the greater amount of production, the more (fast) food; the greater amount of 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). 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 want to do with “affordable” utility service? A regulator’s job is always to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is not a variable. To produce 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 action that is further 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 best off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to leave an advantage 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: The Proper Roles for Regulators Unless essential services are affordable, government shall never be credible. Regulators, being part of government, need to help. (A commission staff chief told me 25 years back, “Sometimes you have to put away your principles and do what’s right.”) Plus some regulatory statutes explicitly require the regulator to help make service “affordable.” (as it is the case, I am told, in Vanuatu, an nation that is 83-island the South Pacific.) Listed below are three straight ways, consistent with economic efficiency, for regulators to handle 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 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 absence of guns from children’s homes and communities is considered 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 raises prices within the short run, reduces total costs when you look at the run that is long. Expose the side that is dark of. 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. Using 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, to ensure citizens are able utility service priced properly.

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