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.


Artificially Narrow

Those who cite the "regulatory compact" talk only of an exchange of service for money.  The real relationship is richer.  It requires the utility to satisfy the regulator's standards for performance at "lowest feasible cost,"3 to use "all available cost savings opportunities"4; and to pursue its customers' legitimate interests free of conflicting business objectives.  In return, the regulator must establish compensation that is commensurate with the utility's performance.  But there is more.  To set standards for performance and ensure compliance, the regulator must have the resources, expertise and political support that is at least the equal of the utility's.  And for this relationship to work to each party's benefit, it must include a mutual commitment not to use the political process to undermine either the utility's or the regulator's ability to do their jobs.  Those who talk of a "regulatory compact" leave most of these factors out . . . 

Services

Testimony, Papers, and Presentations

A layperson’s introduction to regulation created by Scott Hempling in support of The British Columbia Utilities Commission's inquiry into whether utility regulation should extend to utilities owned by indigenous nations.
This tesimony relates to the modification of rates, charges, and tariffs for retail electric service in Oklahoma.
The testimony relates to AltaGas’s proposed acquisition of WGL Holdings, Inc. and Washington Gas Light Company.
The testimony addresses the following: the effect of the transaction on consumers, including: (1) reasonableness of the purchase price, including whether the purchase price was reasonable in light of the savings that can be demonstrated from the merger and whether the purchase price is within a reasonable range; (2) whether ratepayer benefits . . .
Testimony addresses the issues of whether the proposed transaction affects the interests of ratepayers; the ability of JCP&L and MAIT to provide safe, adequate, and proper utility service at just and reasonable rates; and whether the proposed transaction is in the public interest.

Books by Hempling

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

Now Available on Kindle

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Hempling Appearances

Energy Bar Association
Panel on Practice Principles for New Regulatory Lawyers


UDC Law School Panel
Is the Exelon Takeover of Pepco in the Public Interest?


Nigeria Electricity Regulatory Commission
3rd Judges’ Seminar


Telecom Forum
Asamblea Plenaria REGULATEL


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Testimonials

Working with Scott Hempling is both a pleasure and an honor. Ethical, fair-minded, and dedicated—these are a few of the attributes that Scott brings to his work and his clients. His pursuit of justice is to ensure that a practical outcome will ensue. Scott recognizes the significance of every issue and its implications for any person involved either directly or indirectly. His wide-angle lens encompasses a broad and deep technical legal knowledge that allows him to decipher and give insight into every challenge.
— Elise Herzig, President and CEO, Ontario Energy Association