Effective Regulation of Public Utilities

          Newcomers to utility regulation bring disparate ideas about its purposes and processes. These young professionals, a talented group of whom shared thoughts with me recently, deserve more clarity on what we do, how we do it and why. Here are five subjects requiring our attention.

Purpose of regulation

          The purpose of regulation is performance. Effective regulators first define the desired performance, in terms of product mix, quality, cost, and safety. Then they determine the market structures—the mix of monopoly and competition—most likely to attract the players whose actions will most cost-effectively produce that desired performance. Then they provide ways to pay, or penalize, these performers for their performance. Effective regulation is leadership regulation: defining performance, then holding companies accountable for their performance. Sitting back, waiting for parties to say what they want, presiding instead of leading? That's not regulation; it’s abdication.

          One newcomer compared utility regulation to highway safety regulation. Yes, in part. Speed limits, like all regulation, align private behavior with the public interest. But safety regulation emphasizes protection. In the utility space, consumers are not mere victims to be protected; they are actors to be empowered. So regulators must empower as well as protect. When we re-examine decades-old monopoly market structures, when we test whether competition can improve monopolists’ performance, we empower both consumers and competitors: Consumers reveal their diverse needs; new competitors strive to satisfy those needs. Performance improves. Effective regulators don’t merely prevent harm; they demand excellence. If regulators satisfice while sellers maximize, we get lopsidedness.

"Protect" from what?

          Protecting implies danger. Identifying dangers makes some regulators skittish, because no one likes to impute negative motives to nice people. But to design effective protections, we must be explicit about the dangers. Four are beyond dispute. First, every monopolist strives to keep and grow its monopoly. Second, every competitor seeks to become a monopoly, because (as economist John Hicks wrote) “the best of all monopoly profits is a quiet life.” Third, consumers and sellers alike value their short-term interests more than the public's long-term interests. Fourth, if in regulatory proceedings winning depends on obscuring, distracting, and deceiving, some parties will do all three if the chance of success is high and the penalty, if caught, is low. So protecting the public interest means exposing these dangers, expressly and directly. Wishing them away, looking the other way, favoring comity over candor—regulatory weakness lets dangers thrive.

"Balancing" what?

          There must be something in the regulatory drinking water.  Newcomers routinely describe regulators as "referees," and regulatory decisionmaking as "balancing stakeholder interests" after "looking at both sides."  Substantively and psychologically, these sentiments are wrong. . .