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“Affordable” Utility Service: What is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators to make utility service “affordable.” This picture has three problems. Wealth Redistribution is certainly 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 expenses it causes. None of those steps—prudent cost identification, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only we lower rates for the unfortunate by raising rates for others if we jigger the numbers—if. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of just one class to profit another, with this exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck with the rates regulators set. Rather than shifting costs between customer classes, regulators might redistribute wealth in another way: by “taxing” shareholders, i.e., reducing shareholder returns underneath the otherwise level that is appropriate. But taxing shareholders isn’t any more the regulator’s domain than is taxing other customers. 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 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 the electorate; not by professional regulators, whose focus needs to be industry performance. Affordability of any product—groceries, a Lexus, or utility service—depends on a single’s wealth and income, as well as on the cost 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. However these initiatives are outside regulators’ authority. In order to make regulators responsible for affordability is illogical. Cheap Energy is Cheap Politics Politicians who argue for affordability use the road that is easy. 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 receive as opposed to encouraged to contribute. But no family, no congregation, no civil society, thrives if its key verb is “take” rather than “give.” So when lower rates now result in higher costs later, citizens become cynical. Self-doubting, also, while 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 is found the cause of our obesity epidemic: low food prices. Studying 40 many years of data, he spotted both correlation and causation between girth growth and value 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 lower the cost, the greater amount of production; the more production, the more (fast) food; the greater food, the more calories available; the more calories available, the greater 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 need 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 is certainly not a variable. Which will make service affordable into 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 further action can create benefits without increasing costs by significantly more than the huge benefits. Conversely, economic inefficiency exists whenever we forego some action that, if taken, can make someone best off without making anyone worse off. To over-consume, to waste, to do something inefficiently, to go out of good results 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 will not be credible. Regulators, being section of government, have to help. (A commission staff chief told me 25 years ago, “Sometimes you have to put aside your principles and do what’s right.”) Plus some statutes that are regulatory require the regulator to help make service “affordable.” (As is the situation, i will be told, in Vanuatu, an nation that is 83-island the South Pacific.) Here are three straight ways, in keeping with economic efficiency, for regulators to deal with affordability. Help the unlucky reduce usage. 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 only 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, regardless if it increases prices when you look at the short run, reduces total costs in the long run. Expose the dark side of under-pricing. As opposed to 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 situation of overconsumption, the error of under-pricing. Making use of 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 result in higher incomes, so that citizens are able to afford utility service priced properly.

“Affordable” Utility Service: What is Regulation’s Role? With the nation’s economy stressed, politicians are pressuring regulators to make utility service

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