From the Blog

Is A Strong Regulator Anti Free Market?

8

MARCH, 2017

I am a free market loving person who generally believes that government regulation constrains economic growth. I also believe that utility commissioners in traditionally regulated states need to be strong, decisive, non-passive regulators to truly fulfill their designed roles.

 

As a PSC Commissioner, I’ve heard regulators voice concerns that being a strong regulator is micromanaging a company and I’ve talked with state leaders who believe a strong regulator is anti-free market. I’ve even been criticized for being too “hard” on some of the utilities that I regulate. I had to stop and ask myself, “Is it a bad thing to be a strong regulator?” To answer this question, I had to go back to why we have utility regulation in the first place.

The concept of the regulatory compact recognizes a set of mutual rights, obligations, and benefits forming, in effect, a relational contract between utilities and their customers. The utility is granted an exclusive service franchise/territory, and in exchange accepts the responsibility to serve everyone in the territory and submit to price (rate) regulation. The utility is obligated to supply service efficiently. However, it has the right to recover its costs, including an opportunity to earn a return/profit equal to its market-determined cost of debt and equity capital.

Without regulation, monopolies would participate in monopolistic pricing structures. The monopoly wants to set the highest price possible and control the level of output to maximize profits. Since there is no substitute for electricity and there are no competitors, monopolies can achieve this sweet spot at the expense of the consumer. Therefore, regulators then must assume the role of competition in a monopolistic market.

Competition in markets force companies to change their pricing strategies, find efficiencies, innovate, and cut costs. A strong regulator of monopolies, is in effect, providing the market forces of a strong competing company in a free market. Conversely then a weak regulator is providing the market forces of a weak competitor, allowing one company to dominate another, where the consumer ends up paying more, getting less service, or both.

No matter how valid the reason, whenever the government takes a free market and interjects pricing regulations, it stops the free market powers from working to their full potential and, consumers may end up with a disjointed system. The results of cherry picking elements of the free market and injecting them into the traditional regulatory compact could limit the regulatory compact’s effectiveness and may not gain the benefits desired.

I would argue that in traditionally regulated states, the urge to inject free market principles in a regulated monopoly service territory may, on the surface, appear to be promoting the free market. These principals must be thoroughly vetted as they may have anti-competitive results if not done well, or if they do not go far enough. That would be the same as half-heartedly running your company in a competitive market and allowing your competitors to gain a strategic advantage.

 “To Accomplish This Task, We Need Strong Regulators”

In the energy industry, there are pressures to bring free market principles into regulated markets. There are also movements to introduce more regulations in a competitive market. As a strong believer in the free market, I support many of these initiatives; however, I also see the benefits of traditionally regulated utility markets. I firmly believe that we need to make up our minds. It’s almost akin to being “kind of” pregnant. You either are, or you aren’t.  Either we regulate utilities under the regulatory compact or we have a free market.

My concern is that regulators want to move toward competitive pricing structures and embrace new technologies, but are fearful of doing so. They want to tiptoe into the water, but their apprehension may trigger a full-scale retreat at the first ripple. By not having a clear direction of where they’re headed, they may wake up to a regulatory structure that is disjointed, not competitive, not effectively regulated, languishing in some regulatory purgatory. Are we going to embrace the free market principles or are we going to regulate utilities traditionally? Whatever we decide, we need to have a well-articulated plan with a vision of where we want to end up, and then enact policies and procedures that stand behind that desired regulatory model.  To accomplish this task, we need strong regulators.

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