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« Affordable » Utility Service: What is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators to create utility service « affordable. » This picture has three problems. Wealth Redistribution is Not Regulation’s Department The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. Rate design makes each customer category bear the expense it causes. None of those cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue only whenever we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for others. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of one class to profit another, using this exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck with the rates regulators set. In the place of shifting costs between customer classes, regulators might redistribute wealth in a different way: by “taxing” shareholders, i.e., reducing shareholder returns below the otherwise appropriate level. But taxing shareholders isn’t any more the regulator’s domain than is taxing some other clients. And it’s likely unconstitutional: Having invested to serve the general public, shareholders expect « just compensation, » undiminished by a forced contribution for affordability. Moving money among citizens is important to a society that is fair. Poverty is intolerable and private charity never suffices, so government steps in. But helping the luckless ought to be done by political leaders, who must justify their actions to your electorate; not by professional regulators, whose focus must be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends using one’s wealth and income, as well as on the expense of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if we lowered their cost of housing, medical care, transportation, or education. But these initiatives are outside regulators’ authority. To produce regulators accountable for affordability is illogical. Cheap Energy is politics that are cheap Politicians who argue for affordability take the easy road. All efforts that increase costs, while commanding the regulator to make service « affordable, » is low-risk politics, responsibility-avoidance politics, cheap politics to legislate economic development, greenness, reliability, energy independence, and technology leadership. When politicians call for « lower rates, » the electorate feels entitled to get in the place of encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is « take » rather than « give. » As soon as lower rates now lead to higher costs later, citizens become cynical. Self-doubting, also, while they question their capability to tell apart pander from policy. These are the results when politicians avoid their responsibility for affordability. « Affordability » Undermines Regulation’s Responsibility Mathematician Carson Chow says he’s found the reason for our obesity epidemic: low food prices. Studying 40 several years of data, he spotted both causation and correlation between girth growth and cost declines. He traced these trends to government farm policy shifts (from spending money on non-production to stimulating full production) and technology boosts (which lowered production costs). The low the price, the greater amount of production; the greater amount of production, the more (fast) food; the greater amount of food, the more calories available; the greater calories available, the more calories consumed. See C. Dreifus, « A Mathematical Challenge to Obesity, » The New York Times (May 14, 2012). We have been both over-consuming and under-appreciating: Dr. Chow discovered that « Americans are wasting food at a progressively increasing rate. » (Fairness point: Chow has his doubters. See Michael Moyer, « The Mathematician’s Obesity Fallacy, » Scientific American (May 15, 2012). What does food have to do with « affordable » utility service? A regulator’s job is to regulate—to performance that is establish, then align compensation with compliance. In this equation, affordability just isn’t a variable. In order to make service affordable to your unlucky, the commission would need to lower the cost below cost. That leads to overconsumption, to Dr. Chow’s « waste. » This inefficiency hurts everyone. Economic efficiency exists when no further action can create benefits without increasing costs by a lot more than the huge benefits. Conversely, economic inefficiency exists whenever we forego some action that, if taken, can make someone better off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to go out of an advantage on the table, makes everyone worse off. Underpricing in the true name of affordability makes someone worse off, unnecessarily. How sensible is that? Actions for Affordability: The Right Roles for Regulators Unless essential services are affordable, government shall never be credible. Regulators, being element of government, need certainly to help. (A commission staff chief told me 25 years ago, « Sometimes you need to put aside your principles and do what’s right. ») Plus some regulatory statutes explicitly require the regulator to produce service « affordable. » (As is the outcome, I am told, in Vanuatu, an 83-island nation in the South Pacific.) Listed here are three ways, consistent with economic efficiency, for regulators to handle affordability. Help the reduce usage that is unlucky. Regulators can advocate for affordability by pressing for policies that make consumption less costly, like improved housing stock, « orbs » that signal high prices, and lighting that is efficient appliances. Analogy: Doctors save lives not merely by treating gunshot wounds, but by advocating for gun safety. (American Academy of Pediatrics: « The absence of guns from children’s homes and communities is one of reliable and effective measure to prevent firearm-related injuries. « ) Interpret « affordability » as long-term affordability. Getting prices right and preventing overconsumption, just because it raises prices into the short run, reduces total costs in the long haul. Expose the side that is dark of. Rather than follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: about the real costs of utility service, the issue of overconsumption, the error of under-pricing. With their credibility rooted in expertise, regulators can pressure legislators to do something on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these lead to higher incomes, in order that citizens can afford utility service priced properly.