"Regulatory Compact"

Reader responses to the March 2015 essay, "What 'Regulatory Compact'?":

From David Boonin, President & Founder–TBG Consulting:

We agree that some type of a compact exists, just that some define it too narrowly.  Just like with taxi medallions, there is no guarantee that a utility investment will be profitable.  With the threat of ride-share services in Philadelphia, the market has not bid on new medallions at a price significantly below what ones sold for recently.

The compact must address efficiency on both sides of the meter.  If a utility fails to perform, the regulator may consider many options, including the death penalty of stripping the utility of its certificate of public convenience and forcing a sale of the utility’s other assets to a new provider.  But before we take such a drastic response, let’s focus on performance or incentive based regulation.  In an ideal world, utilities would act in the public interest, even if it were not in their private industry.  They would run their power plants efficiently even if it cost them profits. But we do not live in an ideal (or perfectly competitive) world and thus the need for effective regulation that rewards behavior aligned with the public interest.  This synchronization of the private interest with the public interest should be a goal of effective regulation and requires a system that rewards certain conduct and eliminates disincentives for behavior, again on both sides of the meter, in the public interest. 

Dating back many decades, when I was a senior staffer for a regulatory commission, I recall my staff coming to me with assertions that a group of  utilities were behaving in a way that was not consistent with the public interest.  After we dismissed the possibility of collusion, I challenged the staff to look for what was causing this inferior behavior.  After some thought, the frequent answer was one of the Commission’s own policies.  I found this to be good news, as changing a regulation to better synchronize the public and private interest is often easier and more effective than some enforcement actions, telling the utility that it should be doing something, even if it hurts its owners, because the regulations are sending the wrong signals.

Of course, utilities have a responsibility to behave efficiently, as should consumers.  But as part of the so-called regulatory compact, let’s look at ourselves as thought leaders in the regulatory community and help create ever-improving regulatory environments for this to occur – a discussion for another day.


From Jonathan Lesser, PhD, President–Continental Economics, Inc.:

. . .[You begin your essay with a] quote from the first edition of Leonardo Giacchino’s and my textbook, Fundamentals of Energy Regulation.  . . .

The remainder of the paragraph focuses on the economic underpinnings, namely geographic exclusivity in the exchange for an obligation to serve everyone in that region.  It has nothing to do with the Court’s decision in Duquesne, at least not in our view.   Moreover, the next paragraph begins, “Because the regulatory compact is nowhere written down, you may get different opinions as to whether it, in fact, exists, depending on whom you ask.” 

You state, “This is the formula fed to regulatory newcomers:  smooth, sweet and easily digested.  But it lacks the essential nutrients.”  We don’t know about the nutritional content of the book, although ingesting the pages could be part of a balanced, high-fiber diet.  However, we believe your article makes inferences based on things we neither claim nor state.