Effective Regulation of Public Utilities

          Last month’s essay, “Promoting Diversity and Prohibiting Discrimination: Is There a Regulatory Obligation to Society?,” addressed the Supreme Court’s 1976 decision in National Association for the Advancement of Colored People v. Federal Power Commission. The Court held that the Commission had no power to issue a rule banning racial discrimination. The reason: While certainly consistent with the general “public interest,” such a rule lay outside the Federal Power Act’s purpose, which was the electric industry’s economic performance.

          The essay accepted the premise that utility regulation is about economic performance, but argued that diversity in a utility’s board, executive suite, managerial ranks and employee base is relevant to a utility’s performance. A utility that looks like the community it serves will better serve that community. That premise supports, indeed requires, that regulators make diversity a priority. Regrettably, since that essay came out 10 years ago, few state commissions have taken the necessary actions. Maybe recent events can make a difference.

          The essay received commentary from five committed, thoughtful people: Steven Weissman, Jeffrey Ackermann, David Yaffe, Jason Zeller and Cynthia Chaplin. Their submissions follow.

Steve Weissman, Lecturer, Univ. of Calif. Berkeley Goldman School of Public Policy; Former ALJ and Commission Advisor, Calif. PUC

          The NAACP case provides an invitation for regulators to think more expansively about how utility processes and behavior have an impact on ratepayers’ interest in safe, reliable, and reasonably priced service.  For instance, a Commission could conclude that a utility with strong minority hiring practices will be better situated to provide the best service at the best price because: (1) a welcoming work environment improves employee morale which can enhance safety, reliability and economic efficiency, and  (2) active consideration of the full range of contractors (including minority contractors) enhances competition based on price and service quality. With these concepts in mind, regulators could conclude that utility rates and service cannot be just and reasonable without an active minority hiring program.

          Regardless of how wide of a lane was paved by the Court in NAACP, regulators have long moved beyond a blindered view of ratepayers’ interests to ensure that utilities are good corporate citizens. For instance, when Pacific Gas & Electric’s transformers started leaking carcinogenic chemicals. it wasn't just a matter of it responding by doing just what the law might require.  The utility was expected to spare no expense and clean up the mess, regardless of fault. Regulators have ordered utilities to convert their vehicle fleets to low- or no-carbon cars and trucks, even when this was not the cheapest alternative. Regulators, at least in California, have long erred on the side of supporting union labor by approving prevailing wage formulas for the labor component of the revenue requirement.  Perhaps some of the decisions in this spirit get by just because no one contests them, or no court elects to hear the case. But there also may be a tacit agreement that utility regulation is a broader expression of the collective values of the community. In providing services that are vested with a public interest, the utilities are expected to do the right thing. NAACP does not address this rationale, but it also does not get in the way.