“Affordable” Utility Service: What is Regulation’s Role? Aided by the nation’s economy stressed, politicians are pressuring regulators in order to make utility service “affordable.” This picture has three problems. Wealth Redistribution is 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 expenses it causes. None among these steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue only when we jigger the numbers—if we lower rates for the unfortunate by raising rates for others. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of just 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. As opposed to 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 isn’t any 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 vital 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 to your electorate; not by professional regulators, whose focus should be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on a single’s income and wealth, and on the expense of other products. The poor could better afford utility service when we raised their income and increased their wealth. Or if we lowered their cost of housing, medical care, transportation, or education. However these initiatives are outside regulators’ authority. To create 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 instead of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” in the place of “give.” So 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. They 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 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 full production) and technology boosts (which lowered production costs). The reduced the fee, the greater production; the greater production, the more (fast) food; the more food, the greater 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). Our company is both over-consuming and under-appreciating: Dr. Chow found 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 to regulate—to performance that is establish, then align compensation with compliance. In this equation, affordability is certainly not a variable. In order to make service affordable into the 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 further action can create benefits without increasing costs by more than the huge benefits. Conversely, economic inefficiency exists as soon as we forego some action that, if taken, could make someone better off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to go out of a benefit up for grabs, makes everyone worse off. Underpricing when you look at 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 element of government, need to help. (A commission staff chief told me 25 years back, “Sometimes you must put away your principles and do what’s right.”) And some statutes that are regulatory require the regulator to create service “affordable.” (As is the case, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Listed below are three ways, in line with economic efficiency, for regulators to deal with affordability. Help the unlucky reduce usage. 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 the most reliable and effective measure to prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, regardless of if it increases prices within the short run, reduces total costs when you look at the long haul. 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: in regards to the real costs of utility service, the problem of overconsumption, the error of under-pricing. Due to their credibility rooted in expertise, regulators can pressure legislators to act on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these lead to higher incomes, to ensure citizens are able to afford utility service priced properly.