Educating Public Utility Regulators: Is It Fruitful?

“Regulation did not originate as a goodwill gesture from enlightened attorneys who wanted to spread their notions of the public interest…. It emerged in its current shape largely as a way to enforce Samuel Insull’s efforts to protect his empire from competition for the long term….”

Attorney and author Scott Hempling makes his living testifying before regulatory commissions, often on behalf of public interest and consumer groups. The is author of “Certifying Regulatory Professionals:  Why Not?” recently posted on ElectricityPolicy.com, (Part I here; Part II here), from which I quote below.

His argument is straightforward.  Today, policy and technology are always in flux, which changes the boundary between efficient and inefficient practices. People should know more. Things would surely be better if only regulation were driven by both facts and expertise, an “independent force that aligns interests of the regulated with the public interest.”

The increasing complexity of industry issues needs to bring  forth a consensus of competence. Hempling wants “centripetal” regulation that “[pulls] the profession toward a common vision of excellence in industry performance.” Assuming you agree that it’s a profession, specialist certification will both “[define] purpose and protect the public.”

Education is No Escape

Yes, in response, technical issues do matter, and reasonable people with good credentials can differ about the rate of return a utility should earn. The nice thing about regulation is that it lets all of them tell their stories on a reasonably public record. But the problem is that almost everyone testifying sounds credible in light of “scientific” knowledge about power and its economics.

No amount of education for commissioners and staff is going to change that. My experience has been that more education often serves as reinforcement for views people have held all along. Ask an econ professor and he might even have a model to explain why. Regulation has its roots in politics and all the niceties of administrative law will never break that link.

Romantic Government vs. Real Politicking

Politics? That word is utterly absent from Hempling’s post. It’s an odd omission because disregarding the link between regulation and politics probably degrades the outcomes of both. If your politics happens to coincide with your notion of the public interest, it is highly satisfying to assume that they are two sides of the same coin, where one face reads “In God we trust” and the other says “tails, you lose.”

Think about regulation’s record. For a long time, competition would have been feasible and generally beneficial in many corners of the power industry, but very few regulators endorsed it. Ditto for rate structures that were devoid of cross-subsidies, programs instituted for political correctness rather than efficiency and lots more. Regulation did not originate as a goodwill gesture from enlightened attorneys who wanted to spread their notions of the public interest.

It started as another variant of hardball. It wasn’t the creation of some progressives in Wisconsin. It emerged in its current shape largely as a way to enforce Samuel Insull’s efforts to protect his empire from competition for the long term, as books such as Rob Bradley’s Edison to Enron: Energy Markets and Political Strategies (2011) documents in great detail. [1]

In a lot of ways it’s still Sam’s regulatory model, a durable political bargain among interest groups that generated rents to be distributed between producers, consumers and, now, environmentalists.

There’s a large research literature from economists and historians on the origins of regulation, and when we confront the ideals with the data we do not get Hempling’s vision. Regulation arose not because little people were oppressed by monopolists but because monopolies needed to harness the power of the state to hold competition at bay.

If you need a contemporary example, watch Uber and Lyft try to compete with government-issued taxi franchises that exist for no plausible economic reason. The upstarts have succeeded in some cities and failed in others, all for reasons at best distantly related to anyone’s vision of some public interest.

Electricity regulation is as fertile a ground for wealth redistribution as can be imagined. Most state regulators are appointed and the few who are elected act about the same. Their powers include the ability to selectively tax and redistribute wealth through a ratemaking process independent of the legislature.

Hempling’s Search for Consensus

A large part of Hempling’s post is about the particular subjects that regulators need  to learn, with no evidence that these in particular will repay the effort. If these folks really are just politicians, the payoff could just as well be that they gain increased mastery of regulatory politics.

The real question is whether evidence exists that consumers (and producers – they matter too) are better off in jurisdictions that have better-educated regulators. Hempling says that “Our goal is performance,” without either defining performance or specifying whose goals are “Ours.” And if there is no real evidence of performance is any of this worth the trip?

Near the end of the post Hempling calls for “community-wide commitment,” apparently believing that people with less at stake ought to put as much effort into the politics as those with more. My main interest as a consumer is not community commitment, but cheap and reliable power.  Environmental compliance and low-income assistance are for other parts of government.

All this seems to puzzle Hempling, who professes he does not understand “why the profession [i.e. regulation] and the public it serves seem satisfied with the absence of shared standards.” There’s no reason to be upset because politics gets lots of things wrong in retrospect and we all know it. Its saving virtue is that now and then it manages to make things better than happens under dictatorships.

——————-

[1] See Part I: “The Chief: Samuel Insull,” pp. 19–221.

————-

Robert J. Michaels is a leading authority in the areas of natural gas and electricity regulation; applied antitrust law; and managerial economics. He is professor of economics at Cal State Fullerton; a senior fellow at the Institute for Energy Research; and an adjunct scholar of the Cato Institute.