"Regulatory Capture" — Is It Real?

My September essay (“Regulatory Capture"— Is It Real?) produced some fascinating responses, including one commission chair who wrote to me immediately, wanting to know how to contact the commission that wanted to be “on a path to self-improvement so rigorous, so disciplined, so transparent, so determined, and so optimistic....”  

The authors below were kind enough to allow me to reprint their responses to my essay.  I am grateful for their attention and efforts, and for their obvious commitment to excellence in our profession.

 

From Fred S. Grygiel:

Scott Hempling's September 2012 Essay provides a timely reminder of "the" problem facing state regulatory commissions, whether elected or appointed. To paraphrase a famous line from Karl Marx, "A specter has haunted state regulation for as long as there have been commissioners overseeing the operations and finances of railroads and utilities. And that specter is Regulatory Capture!" It undermines public confidence in both the process and the economic decisions made by regulators. The costs of Regulatory Capture are many, but the obvious ones are higher rates, lower performance, and excessive returns to capital.

In my view there are two key components of Regulatory Capture: (1) loss of regulatory independence through inadequate mechanisms to preserve the "record" as the only basis for decisions, and (2) the appearance that regulators are either compromised or inadequately prepared to deal with complex cases, compared to company resources and capabilities. The Road to Regulatory Capture is paved with some combination of regulator complacency, cozy relationships with regulated companies, and ultimately, conflicts of interest that may result in ethical, and in extreme cases, criminal misconduct.

Regulatory Capture can begin long before a single decision is made. The selection and appointment of inexperienced/unqualified candidates sends a clear negative message to ratepayers. When political comptetency, as opposed to professional competency, drives the appointment process, ratepayers can expect an unlevel playing field favoring the regulated.  The potential corruption resulting from Regulatory Capture may take the form of future private sector job opportunities, reappointment assurances, and a variety of status-enhancing emoluments for conflicted commissioners.  The major damage is to the integrity of the decision-making process.  The concept of Regulatory Capture is comparable to cases of Legislative Capture, Judicial Capture, and yes, Executive Capture. The failure to apply the concept broadly gives the unwarranted impression that only administrative agencies can be captured.

Looking forward to the October 2012 Essay on the warning signs of Regulatory Capture and what can we do about it.  And given the opinion that Stigler and many others have reached that "...as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits," exploring "what we can do about it" is a critical job for all of us.

 

From Indiana Commissioner Larry Landis:

The classic article on this topic was "The Marasmus of the Interstate Commerce Commission," published in a technical (political science) journal way back in the 40s, as I recall.  Much to my amazement, the article turns up in Google....along with commentaries and critiques, including a reference to the article within an article on regulatory capture.  See The Yale Law Journal, Vol. 61, No. 4 (Apr., 1952), pp. 467-509.

I read the article as part of a course on Administrative Behavior/Political Science as an undergrad in about 1965 and obviously it made an impression.  The prof also taught Con Law, the toughest course I took—undergrad or graduate—in political science.  To this day I can give you the cite to Marbury vs. Madison:  1 Cranch 137.

 

From Jeff Shields

I was impressed with your "Regulatory Capture" essay.  I have suggested to some at the CPUC that the appropriate punishment for PG&E—in light of the death of eight citizens in San Bruno and another death two years earlier in Rancho Cordova—is that the CPUC put the franchise of PG&E Company (the regulated utility) up for sale.  Look, if Major League Baseball can force Frank McCourt to sell the LA Dodgers franchise (and he didn't kill anyone), then surely a regulated monopoly that admittedly created 3,065 violations spanning back to 1993 (which the CPUC's own Consumer Protection Safety Division has determined the potential total fines for those violations is over $220 Billion) should warrant more than some token fine. The CPUC had its own investigation of the Commission's relationship with PG&E and it was determined that the Commission was coddling PG&E, which contributed to the lax culture toward safety.

If the CPUC is to regain a shred of consumer confidence, they will have to levy a significant punishment against PG&E. But they can't go after the ratepayers and they really can't destroy the ability of the utility to raise the money to rebuild the system. So the one thing they can do is force the sale of the franchise and remove the Board of Directors and management.

As it turns out PG&E Company is only a subsidiary of PG&E Corp, so the Commission can leave intact the Corporation and just put the regulated monopoly utility on the block.


From Kansas Commission Chairman Mark Sievers:

I recommend that you take a look at the piece written very long ago by Richard Posner, "Taxation by Regulation."   See The Bell Journal of Economics and Management Science Vol. 2, No. 1 (Spring, 1971), pp. 22-50.   Posner's view is that regulatory institutions are devoted to creating and maintaining politically-driven systems of taxes and subsidies that would not exist in a competitive market.  Said differently, he views regulation as an arm of political fiscal policy.


From Anonymous Practitioner:

It is stunning how many "important" people do not know what regulatory capture is or how much it plays into what goes wrong.

I have testified often that our legislature should look at increasing compensation for the State X commissioners and technical staff as part of a strategy to improve the potential quality of the Commission's performance and its skill in navigating around/through the pressure that comes with the territory.  But, paying people more is not, standing alone, going to rock an agency back into a balanced position.  What is the difference in the compensation level of the regulators in your three anecdotes?  [not much]

As you know well, when regulatory capture is in bloom, it brings the worst out of all stakeholders.  That is where we are now in State X.

But, I would also say that some people use regulatory capture as a means to hide their own weakness, prejudice, and personal agendas.  Some of the most glaring examples of regulatory capture can be seen in the actions that postpone or avoid making a decision or, as is often the case in State X, in granting rehearing as a strategy to block parties form taking an appeal from a "final" order.  These less visible symptoms of regulatory capture provide important clues about whether a regulator is part of the regulatory capture SWAT team or smart enough to get out of the way so that the immediate consequences of regulatory capture can be attacked by others.  Sometimes, smart, well-schooled people know how to redirect a hostile opposing force against its source.  Many of the martial arts involve methods to redirect a force inspired by bad intentions. 

The use of regulatory capture as an excuse is also real. 

Perhaps your essays and other work could do more to help well-intended regulators redirect the hostile force of regulatory capture.