A Letter to Governors and Legislators

ON APPOINTING EXCELLENT REGULATORS

Dear Governors and Legislators,

Congratulations on your (re-)election. Your many duties include appointing and confirming public utility commissioners. They are responsible for inducing high-quality performance by providers of electric, gas, water, and telecommunications service. Your appointees' decisions will affect millions of consumers; billions of investor dollars; the local, regional, and national economies; and our air, land, and water. Here are eight thoughts on producing top-notch results.

1. Appointments Rooted in Principle

“Regulation” is not a political whipping boy, something to campaign against. Nor is it a unidimensional spectrum on which “more” is better than “less.” Serious regulators do not debate oversimplifications like “command and control” versus “light-handed” regulation. (The regulatory legend Peter Bradford once noted, “I've heard of light-headed regulation, light-fingered regulation, and red-handed regulation; I know little of light-handed regulation.”) Regulation, instead, is about performance: aligning utilities' behavior with the public's needs. Principled regulators ask five questions: (1) What outcomes do we seek to produce? (2) What specific behaviors, engaged in by whom, will produce those outcomes? (3) Which behaviors will occur naturally, without regulation, because they align with the actor's self-interest? (4) Which behaviors, in contrast, will occur only if regulation intervenes? (5) To produce those behaviors, what specific rewards and penalties must regulation introduce?

2. A Ten-Dimensional Job

Utility regulation used to be straightforward. Utilities built infrastructure, sold products and services, proposed rate increases. Commissions approved projects and set rates. Their central aim was to protect customers from monopoly abuse—in the form of imprudent investments, inefficient operations, and undue discrimination against choiceless customers—while setting rates that gave investors a fair shot at a reasonable return.

Today's regulators do much more: They make markets, design programs, administer investment funds, incubate renewable energy industries, disseminate broadband, promote energy efficiency, protect critical infrastructure, and resolve stakeholder differences. They even act as political shields for governors and legislators paralyzed by the complexity of it all.

With all these demands, what does it take to excel at regulation? On a personal level, what must regulators be, and what must they do, to be effective? Next are some thoughts on attributes, experience, vision, ideological baggage, and political skill. I'll close with an alert about asymmetry.

3. Personal Attributes

An effective regulator is purposeful, decisive, and independent. A purposeful regulator defines the public interest by articulating a vision (see #5 below). A decisive regulator acts to align utilities' and consumers' private behavior with that vision. An independent regulator accepts the pressures of public-interest politics (the need to make tradeoffs among meritorious but conflicting goals) but avoids the distortions of private-interest politics (the pressures from narrow forces seeking benefits for themselves). Recognizing that commissions are not courts and regulators are not judges, she not only presides; she leads.

She rejects the rhetorical bipolarity of “markets versus regulation” because she understands, per Dr. Alfred Kahn, that her “central, continuing responsibility” is “finding the best possible mix of inevitably imperfect regulation and inevitably imperfect competition.” She prefers facts and logic over adjectives and adverbs.

4. Professional Experience

Regulation is an eighty-miles-an-hour bus. Someone up front needs to know how it runs and where it should go. Aim for at least one appointee with deep regulatory experience. Promoting a staff person gives a double punch, boosting agency morale while ensuring experience. Add someone who has worked in a regulated industry: not a talker but a doer—someone who planned, financed, built, or operated infrastructure, or who connected with customers. You'll take a hit for the “revolving door,” but you'll gain someone who knows how it feels to be regulated.

5. Vision

A vision is more than a two-sentence mission statement. It is purpose depicted. The regulator with vision can describe the optimal industry structure (in which motivations, behavior, and performance all align with the public interest), its microeconomic features (the product array, customers' experience, sellers' profitability); and its macroeconomic features (the industry's overall performance, its contribution to the state and regional economies, its environmental effects). An effective regulator tests that vision against present facts, makes adjustments, and then designs and sequences the regulatory steps to produce it.

6. Ideological Baggage

In regulation, the shopworn dichotomies are false dichotomies. There is no Republican or Democratic way to regulate. Federal versus state, markets versus regulation, urban versus rural, generation versus efficiency, incumbent versus newcomer, publicly owned versus investor-owned, publicly traded versus closely held: All these “versuses” lead to zerosumsmanship, usually boiling down to mine versus yours. The best ideas come not from ideology, hope, or promises of “good faith”; they come from facts, logic, and extrapolation from experience.

7. Political Skill

Twenty-five years ago, the politics of regulation were easy to follow: Investors wanted solid returns; customers wanted reasonable rates. Positions were predictable; the debate was over dollars. Today, the interests have multiplied in numbers and diversity. The investment community is no longer just shareholders and bondholders; we have private equity, hedge funds, short sellers, holding companies from Scotland, England, Australia, Germany, and France. The consumer community is also splintered; the simple threesome of residential, commercial, and industrial has given way to a United Nations of irrigation farmers, computer manufacturers, military bases, casinos, gold mines, and ski resorts. Each technology has its own interest, from wind turbine manufacturers to smart-grid installers. There are environmentalists, labor unions, privacy advocates, and terrorism consultants.

Many of these newcomers are new to regulation's purpose. Some view the commission as just another government agency—a “public resource center” obligated thereby to give out benefits to those who ask. Others seek protection—from high prices and complicated choices.

Dealing with this diversity requires political skill. The choice is between channeling these perspectives toward a long-term vision of industry structure and performance or producing a series of “compromises” that produce only short-term peace.

8. Resource Asymmetry

With rare exceptions, utility executives know more than their regulators. This asymmetry invades every relevant knowledge category: costs (including opportunities for cost reductions); operations (e.g., the capability, availability, and vulnerability of physical plants); customers (consumption patterns, product preferences, payment histories); market value and financing opportunities; utility staff capabilities; and technological potential.

Addressing this asymmetry is key to regulation's credibility. To induce the utility to provide excellent service at reasonable cost, the regulator must establish standards, then compensate the utility to the extent that it meets those standards. To do so credibly and effectively, the regulator literally needs to know what he's doing. His expertise must match the utility's. The under-resourced, under-informed commission risks (a) setting performance standards too low or rates too high, causing captive ratepayers to overpay for subpar service; or (b) setting performance standards too high or rates too low, weakening the company and losing investors' trust. Regulation's credibility is undermined by asymmetry.

Governors who want independent regulators must obtain for them the staff resources that independence requires: staff whose credentials—and pay—match the utilities'. Ratepayers already pay for the utility's personnel; they won't mind paying for objective staff who can judge utility performance. Allowing commissions to finance their operations through the same rates that pay for utility personnel is the most direct solution to asymmetry.

Conclusion

It's asking a lot to find women and men with the personal attributes, experience, vision, objectivity, and political skill demanded by this ten-dimensional job. But they exist, and they succeed. If you can find them and appoint them, your public will thank you. Good luck.

Comments

Guest

Scott, My idea, which I have discussed with positive-to-neutral reactions from various former State regulators and Chuck Gray, is that NARUC or an independent new organization should empanel on Utility Commission Candidate Review Committees those former state regulators from each state who would be willing to serve. The former regulators, all of whom would share a goal that their former agency be effective and well-led, would serve the same function with regard to candidates for State commissions that the ABA serves with regard to candidates for federal judgeships. They would review the records and credentials of those who are nominated by governors, but also those who self-nominate to be considered as candidates, and those who agree to be identified as candidates when nominated by others who think they would serve well, such as senior state commission staff. They would rate their experience, judicial temperment, knowledge of the industries they would be regulating, with an eye to potential conflicts of interest or backgrounds tending to create bias. They would then develop an annual list of qualified in-state candidates, both Rs and Ds, from whom Governors could confidently pick nominees, or which voters could use to elect competent commissioners, not just the best-funded candidates. I think this could go a long way toward flattening the necessary learning curve for new commissioners, as more would start with significant knowledge. It would tend to identify as too-green the typical Governor's crony who wanted an appointment to something and the utility commission was what was available. And it would build among former commissioners a reason to work together for the betterment of their states' regulatory functioning, keep them involved with all their own institutional knowledge that they might share in the process, and subtly honor them for their own service. Some might even want to put themselves back on the list. What do you think? John Jimison Energy Future Coalition

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