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Public utilities as social agencies

Copyright © 2019 Albuquerque Journal

Public utility regulation has expanded its domain far beyond its original mandate and what is socially optimal. That mandate confines itself to setting “just and reasonable” rates, and acting in other ways to improve the long-term welfare of utility customers. After all, the raison d’etre for public utility regulation is to protect customers from “monopoly” utilities.

Around the early 1990s, state regulators and legislatures throughout the country started to demand that utilities widen their sphere beyond a for-profit commercial enterprise by subsidizing low-income households, accommodating, facilitating and even subsidizing their competitors (e.g., retail solar providers) and renewable energy, investing in politically popular, if not economical, technologies, promoting energy efficiency, and achieving clean-air/climate change targets beyond federal and state mandates. These demands on utilities – which have escalated their costs – hindered their ability to operate as profitable entities providing basic services reliably and economically.

Perhaps ironically, utilities themselves have been complicit in broadening their social responsibility for the purpose of goodwill/public relations that they hope would lead to favorable treatment by regulators and other government officials. Utilities increasingly become strong proponents of subsidized energy efficiency programs and clean energy technologies without a rigorous demonstration that these are in the best interests of their customers.

The growing politicization of public utility regulation has negative repercussions for regulation as an institution. First, it means more special interest influence with additional stakeholders having motives to co-opt the public interest.

Second, emphasis has shifted to short-term (i.e., myopic) or non-economical effects. With greater politicization, regulators have increasingly weighted the effects on the environment, climate, job creation, economic development and other outcomes. This likely results in less concern for long-term customer welfare, as other objectives become integral to regulators’ decisions.

Third, public utility regulators have become more vulnerable to efforts by advocates of special interests to achieve self-serving outcomes at the expense of the general public. Either for ideological or monetary reasons, these groups want to shape the future, and the sooner the better.

Fourth, it increases the likelihood of subsidies and the socialization of costs for new investments. Subsidies – a derivative of increased politicization – can inflict much damage. One common bizarre practice is for electric utilities to subsidize their customers to use less of their core service via energy efficiency initiatives, and to subsidize their competitors under regulatory mandates. Overall, subsidies almost always fail a cost-benefit test from a societal perspective.

Regulators should ask themselves whether utilities’ customers are getting the short end of the stick. Are customers funding the advancement of political objectives through inflated rates without compensatory benefits? The term “turkey stuffing” aptly describes the situation where utilities keep fastening surcharges to a typical customer’s bill to fund investments and other activities, the benefits of which often largely accrue to others, including fringe interests with political leverage.

Today, one could rightly ask whether utilities more closely resemble social agencies than private entities driven to serving only their shareholders and customers. One could also question whether funding political mandates through utility rates best serves customers.

To be fair, regulators are not the sole culprit for the extreme politicization that is threatening the interests of utility customers. Legislative actions set the framework for regulatory actions that often restrict the ability of regulators to serve the public interest. Politics typically propel those actions, with special interests unduly influencing the legislation. We have seen utilities, environmentalists, new market players and other special interests going to state legislatures for favors after failing with regulators. Their intent is to promote their agenda, not society’s interest.

Ending on a somber note, we cannot ignore the reality that regulators’ self-interest may deviate from the public interest. Assuming regulators hold utilities accountable for their actions, who holds the regulators accountable?

Kenneth W. Costello is a regulatory economist and independent consultant who lives in Santa Fe.

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