“Affordable” Utility Service: What Exactly Is Regulation’s Role? Using 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 cover those costs, then designs rates to make the revenue requirement. Rate design makes each customer category bear the costs it causes. None of those steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue only we lower rates for the unfortunate by raising rates for others if we jigger the numbers—if. Achieving affordability through rate design means cost that is compromising 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; but with utility service, captive customers are stuck with the rates regulators set. In the 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 is no more the regulator’s domain than is taxing some other clients. And it’s really 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 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 must be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on one’s income and wealth, and on the cost of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if perhaps we lowered their price of housing, health care, transportation, or education. However these initiatives are outside regulators’ authority. Which will make regulators responsible for affordability is illogical. Cheap Energy is Cheap Politics Politicians who argue for affordability make the easy road. To legislate economic development, greenness, reliability, energy independence, and technology leadership, all efforts that increase costs, while commanding the regulator to create service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics. When politicians call for “lower rates,” the electorate feels entitled to receive in the place of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” rather than “give.” As soon as lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, because they question their ability to distinguish 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 explanation for our obesity epidemic: low food prices. Studying 40 many years of data, he spotted both causation and correlation between girth growth and value 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 price, the greater amount of production; the greater amount of production, the greater (fast) food; the greater food, the greater amount of calories available; the more calories available, the greater 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 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 have 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. Which will make service affordable to 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, can make someone better off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to go out of a benefit 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 will never be credible. Regulators, being part of government, need to help. (A commission staff chief told me 25 years ago, “Sometimes you have to put away your principles and do what’s right.”) And some regulatory statutes explicitly require the regulator to help make service “affordable.” (as it is the scenario, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Listed below are three 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 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 absence 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, regardless if it increases prices when you look at the short run, reduces total costs in the long run. Expose the side that is dark of. 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 situation of overconsumption, the error of under-pricing. Using 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, in order that citizens are able utility service priced properly.