"Too Big to Fail": A Premise without Support

A cafeteria contractor services a government building. Food poisoning kills eight people and hospitalizes dozens. Official investigations find food safety lapses. When fines are proposed, the contractor complains of the financial effects. Nobody takes him seriously. He's fined fully, his franchise is terminated. A new contractor is selected competitively.

Pacific Gas & Electric's pipeline explodes in San Bruno. Eight people perish, dozens are hospitalized. Official investigations uncover inspection procedure lapses. Regulatory proceedings, lawsuits and criminal indictments threaten penalties in the billions. The utility warns of the financial effects. Everyone listens; everyone—including the statute—insists that whatever the full penalty should be, it must be moderated to keep the company functioning.

Why the different treatment? What are the consequences of protecting a company from its errors? And why assume the utility is irreplaceable?


Protecting a Utility from Its Errors:  Five Costs

1.  Subsidies:  Reducing the fines to save the company violates regulation's first principle:  Cost-causers must be cost-bearers.  If the utility doesn't bear its costs, someone else does.  When a pipeline explodes, taxpayers fund the first responders, insurance premium-payers fund the hospitals, and ratepayers pay for the inefficiencies that flow from regulatory lenience.

2.  Dulled motivation:  Penalties function not only as punishments but as inducements--to avoid mistakes and improve performance.  Competitive markets induce performance because the seller's choice is stark:  Please the customer or lose the customer. . . .

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Testimony, Papers, and Presentations

“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.
After a century of near-choicelessness, consumers want supply choices and lower costs; while after a century of solid service, traditional utilities want predictable demand and stable revenues. On both sides, the arguments shade from legitimate and public-spirited to the cagey and opportunistic. Resolving the conflicts requires us to apply economic and legal reasoning that reflects common sense, economic efficiency, and constitutional principles. This article seeks to sort out these points.
Microgrids can enhance security and local control for discrete locations on the larger interconnected electric grid. The relationships and mutual responsibilities of the microgrid and the external grid need to be carefully defined, however. Here is a framework for doing just that.

Upcoming Seminar

The Fundamentals of
Electricity Law

October 8–9, 2014
Wash DC/Silver Spring

  • Law of Market Structure
  • Sales & Pricing of Power
  • Sales & Pricing of Transmission
  • Law of Corporate Structure
  • Climate Change and Regulation
  • FERC Order 1000

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Electricity Jurisdiction

Testimonials

While we will dearly miss you as NRRI's Executive Director—where you have been so invaluable—I am delighted that you will now be in the classroom enlightening and sparking the interest of the next generation.
— Paul J. Roberti, Commissioner, Rhode Island Public Utilities Commission

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