“Affordable” Utility Service: What Exactly Is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators to produce utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly not Regulation’s Department Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to pay for those costs, then designs rates to produce the revenue requirement. Rate design makes each customer category bear the costs it causes. None of those cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only whenever we jigger the numbers—if we lower rates for the unfortunate by raising rates for others. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of just 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 utilizing the rates regulators set. Rather than 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 is no more the regulator’s domain than is taxing other customers. And it’s really 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 essential to a society that is fair. Poverty is intolerable and charity that is private suffices, so government steps in. But helping the luckless should 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 on one’s wealth and income, and on the price of other products. The poor could better afford utility service whenever we raised their income and increased their wealth. Or if perhaps we lowered their cost of housing, medical care, transportation, or education. But these initiatives are outside regulators’ authority. To create regulators accountable for affordability is illogical. Cheap Energy is Cheap Politics Politicians who argue for affordability take the road that is easy. To legislate economic development, greenness, reliability, energy independence, and technology leadership, all efforts that increase costs, while commanding the regulator to make service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics. When politicians call for “lower rates,” the electorate feels entitled to get instead of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” in the place of “give.” And when lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, as 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 production that is full and technology boosts (which lowered production costs). The lower the fee, the more production; the more production, the more (fast) food; the more food, the greater amount of calories available; the greater amount of calories available, the greater amount of 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 want to do with “affordable” utility service? A regulator’s job would be to regulate—to establish performance standards, then align compensation with compliance. In this equation, affordability is not a variable. To produce service affordable towards the unlucky, the commission would have to lower the price below cost. That leads to overconsumption, to Dr. Chow’s “waste.” This inefficiency hurts everyone. Economic efficiency exists when no action that is further create benefits without increasing costs by more than the huge benefits. Conversely, economic inefficiency exists when we forego some action that, if taken, could make someone best off without making anyone worse off. To over-consume, to waste, to behave inefficiently, to go out of a benefit up for grabs, 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 not be credible. Regulators, being part of government, need to help. (A commission staff chief told me 25 years back, “Sometimes you have to put away your principles and do what’s right.”) And some regulatory statutes explicitly require the regulator to help make service “affordable.” (As is the way it is, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Here are three ways, in keeping with economic efficiency, for regulators to address affordability. Assist 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 efficient lighting and appliances. Analogy: Doctors save lives not just 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 the most reliable and effective measure to prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, no matter if it raises prices in the short run, reduces total costs in the run that is long. Expose the side that is dark of. As opposed to follow politicians along the low-price, low-risk, cheap politics path, regulators, like Dr. Chow, can talk facts: in regards to the real costs of utility service, the situation of overconsumption, the error of under-pricing. Along with their credibility rooted in expertise, regulators can pressure legislators to behave on affordability directly by enacting policies that are income-raising. Better education, housing, and health care—all these result in higher incomes, in order that citizens can afford utility service priced properly.