What "Regulatory Compact"?

I recently came across this quote:

There is ... a long-standing, but unwritten, rule that governs cost recovery and lies at the heart of establishing regulated prices. This rule is known as the regulatory compact. Under the regulatory compact, the regulator grants the company a protected monopoly, essentially a franchise, for the sale and distribution of electricity or natural gas to customers in its defined service territory. In return, the company commits to supply the full quantities demanded by those customers at a price calculated to cover all operating costs plus a "reasonable" return on the capital invested in the enterprise.1

This is the formula fed to regulatory newcomers: smooth, sweet and easily digested. But it lacks the essential nutrients. As commonly misused, the phrase "regulatory compact" refers to the regulatory treatment of shareholder investment under the statutory "just and reasonable" standard and the Fifth Amendment's Takings Clause in the U.S. Constitution.2  There is a legal relationship between utility and regulator, and between utility investment and regulator-set rates. But that legal relationship is not "long-standing," it is not "unwritten," and it is not a "rule." To call a "compact" what the Supreme Court has described as "essentially ... ad hoc and factual" is artificially narrow, incumbent-protective, and legally wrong.

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“Regulatory capture” is a ringing phrase, too casually used. But because it is a hyperbolic phrase, it is too readily dismissed. With a careful definition, regulatory capture can be anticipated, detected, and resisted. Regulatory capture does not include illicit acts—financial bribery, threats to deny reappointment, promises of a post-regulatory career. These things all have occurred, but they are forms of corruption, not capture. Nor is regulatory capture a state of being controlled, where regulators are robots executing commands issued by interest groups.
In this proceeding before the Mississippi Public Service Commission, Entergy proposes to sell its transmission facilities to ITC at a gain. The transaction is a “spin-merge” transaction in which Entergy shareholders will end up owning 51% of ITC, along with their shares of Entergy.
Utilities are seeking to earn returns on equity above the real cost of equity. Currently, there are five strategies: (1) move assets from state jurisdiction to FERC jurisdiction; (2) use holding company debt to fund utility subsidiary equity (aka "double leveraging); (3) seek supranormal returns as "incentives" to perform normal tasks; (4) seek authorized returns that reflect certain business risks while shifting those risks to ratepayers; and (5) use "riders" reduce business risks without reducing authorized return on equity. This presentation describes these strategies.

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Regulating Public Utility Performance

“[A] comprehensive regulatory treatise …. In all respects, it merits comparison with Kahn and Phillips."

Regulating Public Utility Performance:  The Law of Market Structure, Pricing and Jurisdiction

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Preside or Lead

Preside or Lead?
The Attributes and Actions of Effective Regulators

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Hempling Appearances

Nigeria Electricity Regulatory Commission
3rd Judges’ Seminar


Telecom Forum
Asamblea Plenaria REGULATEL


NARUC Annual Meeting
Panel on State–Federal Relations


New England Electricity Restructuring Roundtable
The Future of Demand Response in New England

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I highly recommend Scott Hempling. I have known him since 2003, since he was a consultant for the Hawaii Public Utilities Commission on various important and cutting-edge policy regulatory matters in Hawaii, through his time as the Executive Director at the National Regulatory Research Institute. His expertise, knowledge, and experience in all regulatory and energy matters is unmatched, and he would be a highly valuable resource and asset in any such endeavor.
— Carlito P. Caliboso, former Chairman, Hawaii Public Utilities Commission