Effective Regulation of Public Utilities

          In a democratic society built on a capitalist economy, some economic inequality is inevitable.  But current levels of inequality threaten both democracy and capitalism.  As the New York Times recently reported:  “Officially the economy is surging again. But the winnings have gone predominantly to the wealthy.  And the middle class is never coming back.”[1]  What is regulation’s responsibility?

          Regulation's purpose is performance—the economic performance of the industries we regulate. The regulator’s job has four main components:  (1) define the public interest in performance; (2) identify whose private behavior, if unregulated, will conflict with that public interest; (3) design standards that align that private behavior with the public interest; then (4) set and enforce rewards and penalties for those who satisfy or fail the standards.

          For utility regulators, the “public interest” is defined and confined by their statutes.  The typical utility statute requires “reliable” service, offered without “undue preference or discrimination” at “just and reasonable” rates.  Reliable service means service available to all customers at all times.  Just and reasonable rates give the utility a reasonable opportunity to earn a fair return on prudent investment, while not imposing wasteful costs on customers.  Nondiscrimination means treating similar customers similarly and dissimilar customers dissimilarly—by assigning costs to the cost-causers and awarding benefits to the benefit-creators. 

          Because utility statutes focus only on economic performance, the “public interest” addressed by those statutes does not include broad societal objectives.  So said the Supreme Court, holding that the Federal Power Commission had no authority to issue a rule prohibiting utilities from racially discriminating.  Racial equality, while certainly core to humanity’s public interest, was not part of the Federal Power Act’s public interest.[2] 

          What about economic inequality?  Do regulatory decisions contribute to it?  If so, what is regulation’s responsibility? Consider six examples. . . .