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“Affordable” Utility Service: What Exactly Is Regulation’s Role? Because of 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 Under embedded cost ratemaking, the regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement. Rate design makes each customer category bear the costs it causes. None among these steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes an issue 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 one class to benefit another, using this exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck utilizing the rates regulators set. In place of shifting costs between customer classes, regulators might redistribute wealth in different ways: by “taxing” shareholders, for example., reducing shareholder returns below the otherwise level that is appropriate. But taxing shareholders is no more the regulator’s domain than is taxing some other clients. And it is 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 really important to a fair society. 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 towards the electorate; not by professional regulators, whose focus must certanly be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends using one’s wealth and income, and on the expense of other products. The poor could better afford utility service when we raised their income and increased their wealth. Or if we lowered their cost of housing, medical care, transportation, or education. However these initiatives are outside regulators’ authority. To make regulators in charge of 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 which will make service “affordable,” is low-risk politics, responsibility-avoidance politics, cheap politics. When politicians call for “lower rates,” the electorate feels entitled to receive in place of encouraged to contribute. But no family, no congregation, no society that is civil thrives if its key verb is “take” rather than “give.” As soon as lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, because they question their capability to differentiate pander from policy. They are the results when politicians avoid their responsibility for affordability. “Affordability” Undermines Regulation’s Responsibility Mathematician Carson Chow says he’s found the cause of our obesity epidemic: low food prices. Studying 40 several years of data, he spotted both correlation and causation between girth growth and cost declines. He traced these trends to government farm policy shifts (from investing in non-production to stimulating full production) and technology boosts (which lowered production costs). The lower the price, the greater production; the more production, the more (fast) food; the more food, the greater 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 are both over-consuming and under-appreciating: Dr. Chow unearthed 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). So 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 certainly not a variable. To make service affordable to your unlucky, the commission will have to lower the purchase 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 advantages. Conversely, economic inefficiency exists whenever we forego some action that, if taken, will make someone better off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to leave a benefit up for grabs, makes everyone worse off. Underpricing when you look at the true name of affordability makes someone worse off, unnecessarily. How sensible is that? Actions for Affordability: Just The Right Roles for Regulators Unless essential services are affordable, government shall never be credible. Regulators, being section of government, have 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 which will make service “affordable.” (As is the scenario, i will be told, in Vanuatu, an 83-island nation in the South Pacific.) Here are three straight ways, in keeping with economic efficiency, for regulators to handle affordability. Assist the reduce usage that is unlucky. Regulators can advocate for affordability by pressing for policies that produce consumption less costly, like improved housing stock, “orbs” that signal high prices, and lighting that is efficient 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 measure that is effective prevent firearm-related injuries. “) Interpret “affordability” as long-term affordability. Getting prices right and preventing overconsumption, no matter if it raises prices into the short run, reduces total costs in the run that is long. 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 difficulty of overconsumption, the error of under-pricing. Making use of 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 lead to higher incomes, so that citizens are able to afford utility service priced properly.

“Affordable” Utility Service: What Exactly Is Regulation’s Role? Because of the nation’s economy stressed, politicians are pressuring regulators to create utility service “affordable.” This picture has three problems. Wealth...