With the nation’s economy stressed, politicians are pressuring regulators to 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 costs 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 for the unfortunate by raising rates for other people. Achieving affordability through rate design means cost that is compromising to redistribute wealth. It resembles taxation of just one class to benefit another, with this specific exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck using the rates regulators set.
In the place of shifting costs between customer classes, regulators might redistribute wealth in another way: by “taxing” shareholders, for example., reducing shareholder returns below the otherwise level that is appropriate. But taxing shareholders is no more the regulator’s domain than is taxing other customers. And it is likely unconstitutional: Having invested to serve the public, shareholders expect «just compensation,» undiminished by a forced contribution for affordability.
Moving money among citizens is really important to a fair society. Poverty is intolerable and charity that is private suffices, so government steps in. But helping the luckless ought to be done by political leaders, who must justify their actions into the electorate; not by professional regulators, whose focus must certanly be industry performance.
Affordability of any product—groceries, a Lexus, or utility service—depends on a single’s wealth and income, and on the expense of other products. The poor could better afford utility service if 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 in charge of affordability is illogical.
Cheap Energy is politics that are cheap
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 instead of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is «take» rather than «give.» So when lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, as they question their ability to differentiate 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 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 full production) and technology boosts (which lowered production costs). The low the fee, the greater production; the greater production, the greater (fast) food; the greater food, the more 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 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. In order to make service affordable towards the unlucky, the commission would 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 huge benefits. Conversely, economic inefficiency exists when we forego some action that, if taken, could make someone best off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to go out of an advantage up for grabs, makes everyone worse off. Underpricing in the 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 will never be credible. Regulators, being element of government, need certainly to help. (A commission staff chief told me 25 years ago, «Sometimes you need to put aside your principles and do what’s right.») Plus some regulatory statutes explicitly require the regulator to produce service «affordable.» (As is the actual situation, i will be told, in Vanuatu, an ninjaessays log in 83-island nation in the South Pacific.) Here are three ways, in keeping with economic efficiency, for regulators to address affordability.
Help 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 lighting that is efficient 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 measure that is effective prevent firearm-related injuries. «)
Interpret «affordability» as long-term affordability. Getting prices right and preventing overconsumption, regardless if it raises prices in the short run, reduces total costs within the run that is long.
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. With 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 lead to higher incomes, in order that citizens can afford utility service priced properly.