ELECTRIC UTILITY REGULATION:
A LIGHT AT THE END OF THE TUNNEL
by
Jimmy D. Hulett
July 9, 1981
Energy Regulation
Professor Ahrens
')
•
ELECTRIC UTILITY REGULATION:
A LIGHT AT THE END OF THE TUNNEL
Electric utilities are an industry in which the right of
special public regulation has become firmly recognized.
Under
the police power, a state has the right to regulate any business.
This sort of regulation has to do with safety devices, conditions
of
health and well being of employees, and, with more or less
defined limitations, the general welfare of the public.
The
regulation of electric utilities, however, is of a different sort
altogether.
and
It embraces the right to control the very organization
conJuc~
of the enterprise.
It is concerned not only with
safety and welfare, but with the rates charged the public and the
returns or profits realized by the business, as well as with the
products or services furnished.
In the so-called unregulated
business the right to such interference is not recognized.
After
all reasonable provisions for the public welfare have been made,
ordinary business is still free to furnish such services or products
~s
it desires, charge such prices or rates as it is able to exact,
and conduct its financial management according to its own purposes
or contractual arrangements. 1
The basis of regulation was the special public interest in the
particular industries.2
The public interest in electric utilities
emerged from the growing importance of the industry itself, as large
sections of the population became more and more dependent upon its
services.
Most of the local utilities, including the electric
1.
J. Baur, Effective Regulation of Public Utilities, 2 (1976).
2,
Munn v . I 11 ino is , 9 4 U . S • 113 ( 18 7 6 ) .
00169
utilities, have the privilege of a special franchise.
This authorizes
the grantees to use the streets or other public places for the location of their facilities or for other purposes of operation.
The
electric companies are granted the right to lay their mains and
cables under the streets, through which they furnish electricity to
consumers.
Along with the privilege of a special franchise, electric
utilities obtain a condition of monopoly which also creates a special
public interest.
In ordinary business there is widespread competi-
tion, which in itself furnishes adequate protection for the public.
Where there is competition, both the quality of the service and
the-prices charged to the consumers are automatically determined
with fairness to the public, without any attempt at regulation.
The price of the service is in a large measure determined by the
cost, including a fair return on the investment, and the public is
treated fairly.
But if in any business, competition is eliminated,
each company is able not only to determine the conditions and
quality of the service but also to fix the price.
Its chief consi-
_deration is not fairness to the public but its own financial interest. 3
A public utility company, including electric utilities, looks
very much like any other private business firm.
It commercially
advertises its products and services, offers regular employment
opportunities, and has its share values fluctuate in daily stock
market reports.
The seemingly minor difference is that profit for
the public utility is set by a regulatory agency, presumably to
mimic a competitive market process, rather than by the genuine
3.
J. Baur, Effective Regulation of Public Utilities, 5 (1976).
0
interplay of many producers in a competitive market.
But because
profit is set through a quasi-judicial regulatory process, the
~
public utility really differs strikingly from an unregulated business
firm.
Indeed, when regulation sets the firm's rate of return,
incentives within the firm are distorted.4
The early 1970's marked the end of what, during the 1950's
and 1960's, had been something of a golden age for electric utilities
and regulators, notable for its stability, smooth-running and rapid
technological advancement.
few problems.
Electric utilities and regulators had
With a change in the fortunes of electric utilities
and regulators, there was created an increased academic, political,
and legal interest in the utilities' problems.
This change in for-
tune was brought about by a number of factors, such as increased
inflation, increasing relative fuel prices, and probably a reduction
in the rate of technological progress and productivity growth.
Strains were placed on the regulatory process in a number of ways.
With inflation and increased relative fuel prices, the utilities
---were forced into more frequent rate hearings in order to attempt
to maintain their revenues in real terms.
This placed an added
burden on the regulatory process and placed many regulators in a
difficult dilemma:
Either the utilities could be allowed to recoup their
added costs resulting from inflation, or they could be denied these
reimbursements in whole or in part.
The former alternative would
~
be unpopular with rate payers, and the latter would cause the utilities
4.
R. Sherman, Hope Against Hope, in Issues in Public - Utility
Pricing and Regulation, 7 (M. Crew 1980).
00171
problems in replacing thier plant and financing expansion.S
Rate
cases are expensive in terms of cost management time, expensive
lawyers, expert witnesses, and delay.
Moreover, on occasion, the
process may appear unresponsive or irrelevant to the problems faced
by the utilities and their customers.
Indeed, the regulatory pro-
cess itself, to the extent that it takes away talented managerial
resources form the other problems of the company, such as the need
to improve productivity and technology, might be regarded as
counterproductive.6
Dissatisfaction with the commission system of regulation in the
electric utility industries has increased significantly during the
past ten to fifteen years.
To a large degree, this criticism has
been directed at the adequacy of the regulatory response to a series
of major pressures that confront both consumers and the suppliers
of public utility services.
Underlying this criticism is the fear
that regulatory practices and policies will promote distortions in
resource use and income distribution .
.....
There are five major pressures or forces that have exercised
significant influence on regulatory behavior during the past decade.
First, there has been the escalation of public utility costs as
operating and investment expenditures reflect inflation, the availability of resources, and rising incremental costs.
This has led
to repeated demands for rate applications, and an emergent pattern
•
5.
6.
M. Crew,
Introduction to Issues in Public - Utility Pricing and
Regulations, in Issues 1n Public - Utility Pricing and Regulation
1 (M. Crew 1980).
Id. at 2.
(4)
00172
of secular price
increases~
Second, recurrent price increases have
promoted a growing sense of militancy on the part of all classes of
consumers.
As a result, there is mounting political pressure to
resist price increases, to reexamine accepted ratemaking practices,
and to shield low-income and small-volumeuser'sfrom recurrent rate
increases.
Third, there is a growing demand from ecologists and
environmentalists that electric utilities be prevented from exploiting
common property resources (specifically air and water) as a free
good.
The result has been to confront regulators with the externality
problem.
Fourth, diminished new supplies of natural gas and major
cutbacks in new plant expansion among the electric utilities have
produced_abroad-based fear that energy will be in short supply and
that the realiability of existing service will deteriorate.
As a
result, pressures are being exerted by industrial customers, labor,
public utility management, consumer activists, and others to change
policies to resolve these problems.
The recommendations for change
reflect each party's perspective of the causes of curtailment and
shortage.
Fifth, the expansion of new technology in the electric
utility field has presented a challenge to an industry traditionally
organized along the lines of single-firm suppliers in given geographic markets.
This confronts regulation with the need to come to
grips with policies that will accomodate such technological change
while at the same time taking cognizance of the impact of these
~
changes on the pfuralistic structure of an industry composed of
privately and publicly owned firms, most of which are vertically
integrated, while others perform either a wholesale or a distribution
function.?
The regulatory response to the pressure of cost increases has
taken the form of departures from conventional rate base regulation
(RBR) and a trend toward revised rate structures.
A major change
in RBR has come with the widespread introduction of the automatic
adjustment clause (AAC), which permits the flow through of selected
cost increases without a formal regulatory proceeding.
The simplest
forms of the AAC are the fuel adjustment clause (FAC) and the purchase
gas adjustment clause (PGAC).
As of 1976 the Federal Power Commissions
and-forty-three of the state commissions had adopted some form of
adjustment clause.
More refined applications include the volume
variation adjustment clause (VVAC)9 and the Cost Efficiency Adjustment
Clause (CEAC). 10
The VVAC permits the adjustment of prices to keep
gross revenues constant in the face of declining sales; the CEAC
attempts to incorporate a broader cost base to recognize potential
offsets in the form of productivity gains and cost savings elsewhere.
~-common
feature of all AAC's is the objective of keeping the rate
of return constant while expenses increase or decrease.
In addition
to the AAC, many commissions have adopted other steps to reflect
7.
H. Trebing, Market Structure and Regulatory Reform in the
Electric and Gas Utility Industries, in Salvaging Public
Utility Reglllatfon 79 (W. Sichel 1976).
8.
Now the Federal Energy Regulatory Commission (FERC).
9.
See: Federal Power Commission, End Use Rate Schedules, notice
of Proposed Rulemaking with Request for Comments, Docket No.
RM 75-19 (February 20, 1975).
See: Latimer, The Cost and Efficiency Revenue Adjustment Clause
Public Utilities Fortn1ghtly, Aug. IS, 1974 at 19.
10.
00174
cost-push pressures.
Those include the use of a forecasted test
-
-
year, the selection of a year-end rate base, and the inclusion of
construction work in progress (CWIP) in the rate base, all of which
may be considered as departures from typical RBR practices.
departures from RBR reflect two questionable assumptions.
These
One is
that a price increase will both depress demand and promote the
expansion of new plant capacity.
The other is that a liberal policy
toward price increases will minimize resource misallocation and
distortions by more accurately reflecting real cost increases.
The
first assumption will not be satisfied if price increases depress
demand and create excess capacity.
The second assumption overlooks
the fact that departures from RBR may introduce an entirely new set
of distortions.
Departures
from RBR to correct for inflation by
AAC's create a propensity toward redundancy, diminished incentives
to bargain aggressively, overcharges, and a bias in favor of that
combination of inputs or resources most easily shifted forward through
the AAC's.
Further, there is an inducement toward vertical inte-
-gration and joint ventures.
11.
11
The use of AAC's creates a new set
The creation of a fuel procurement subsidiary by electric
utilities is an example of the type of vertical integration
induced by the FAC. The parent utility makes high-interest
loans to such subsidiaries to explore for gas, purchase fuel,
and supply transportation. All these costs are then rolled
into the cost of purchased fuel and shifted forward to the
consumer through the FAC.
The behavior of System Fuels, Inc.,
provides a C?se study of such a subsidiary.
See: Report by
the Subcomrntttee on Oversight and Investigations of the Bouse
Committee on Interstate and Foreign Commerce, Electric Utility
Automatic Fuel Adjustment Clauses, 94th Cong., 1st Sess. 22,23
(19 7 5) •
00175
of biases without providi~g criteria to judge the appropriateness
of the costs incurred.
The regulatory response to cost increases has also focused
attention on rate structure reform.
As a consequence, peak load
pricing has received favorable recognition as a means of promoting
efficiency.
The Madison Gas and Electric decisionl2 reflects an
initial step in the direction of implementing peak/off-peak differentials, and a number of state commissions, such as those in New
York, Massachusetts, and Virginia, are holding so-called generic
rate hearings to explore alternative pricing concepts.l3
It is
important here to point out that peak load pricing may promote load
factor economics and constrain new investment, but its·use does not
assure that resources are employed in a least-cost fashion. 14
A common characteristic of the regulatory response to the
pressures associated with cost increases, environmentalism, and curtailment has been to place a heavy reliance on a policy of accelerated
price increases and improved cash flows for the public utility enter~rise.
'
Increased prices and revenues are assumed to restrict demand,
12.
Wisconsin Public Service Commission, Re Madison Gas and Electric
Company, Docket No. 7423, August 8, 1974.
13.
For example, see: New York Public Service Commission, Proceeding
on Motion of the Commission as to Rate Design for Electric
Corporations, Case 26806.
14.
H. Treving, Market Structure and Regulatory Reform in the
Electric an~·Gas Utility Industries, in Salvaging Public
Utility Regulation 82 ·(w. Sichel 1976).
08176
promote conservation, and assure a continued capacity to serve.l5
However, an improvement in earnings per se provides no assurance
that adequate solutions to these pressures have been found or that
the equity issues have been resolved.
In retrospect there can be little doubt that the sudden increase
in the prices paid by electric utilities for fuel demanded prompt
regulatory action.
The increase in these expenses could not have
been offset by a gradual increase in productivity over time.
~estion
The
is whether remedial action could have been accomplished
most effectively by recourse to AAC's and departures from rate base
regulation, or by prompt interim rate increases and the introduction
of a broader set of regulatory reforms designed to promote the longterm improved performance of the industry.
By opting for the former
solution, the commissions have moved away from traditional regulatory
constraints and toward new policies that seek to stabalize the rate
of return if expenses change, and to stabalize operating revenues
if usage or output declines.l6
Now to briefly examine some of the actual pricing practices of
the industry.
After a cursory review of the rates of the largest
electricity producers,l7 the following generalizations seem to stand:
15.
16.
Revenues for electric, gas, and comrnunicatio~s u~ilities increased
16 percent bewteen 1974 and 1975, while prof1ts 1ncreased 11
percent for the same period. Business Week's ~11 indus~ry composite index (representing manufacturing, bank1ng, serv1ces, and
utilities) showed an increase in revenues of 5 percent and a.
decrease in profits of 6 percent bewteen 1974-75. See: Bus1ness
Week, March 22, 1976, at 104.
Proposals for an AAC that adjusts for all changes in costs
including return on investment have alread~ been suggest7d. For
example, see: Report by the House~~~bcomm1ttee on Overs1ght and
and Investigatiotts, op. cit .. , 123-127.
17 • Federal Power Commission, National Electric Rate Book.
00177
1.
Electric utility rates exhibit both intra-consumer and
inter-consumer price differentials.
Intra-consumer differentials
are represented by block-rate pricing.
Blocks of both kilowatt
capacity and kilowatt - hours of electricity are sold to
consu~ers
at successively lower rates as their total consumption per billing
period increases.
Five to six such blocks are typical.
Inter-consumer
discrimination, ontheother hand, is exemplified by class-rate pricing.
Customers are typically divided into at least three classifications:
residential, general, and large general.
The residential schedule
is usually of the declining block-rate variety assessed on a simple
kilowatt-hour basis.
There is often a minimum bill and adjustments
may be made for geographic location, fuel costs, and special uses
(e.g., water heating, all electric services, space heating, etc.).
The general service rates are virtually identical in form to the
residential tariff but fixed at a higher level.
The large general
user rate schedule is typically a mixture of two tariff types:
declining block-rate tariff and the maximum-demand tariff.
the
Under
--this type of tariff a special maximum-demand meter is installed to
measure both the kilowatt-hour "energy" consumption of a customer as
well as his maximum kilowatt "demand" during a billing period.
Both
of these quantities are subject to declining per-unit charges as
more units of each are consumed.
Thus an attempt is apparently made
in the case of these large consumers to charge for operating and
capital costs separtely.
2.
Although a few firms charge a winter-summer differential,
there is little further evidence of peak load pricing practices among
00178
electric utilities.
The maximum-demand tariffs cha~ged large
industrial users fail to properly take peak load capacity costs into
account because they measure only the customer peak and not the
customer's use at the coincident system peak.
3.
Several of the utilities charge rates that are geographic-
ally differentiated.
Some geographical differentiation of rates is
apparent in the rates of several of the largestregulated electric
utility firms:
Southern California Edison, Pacific Gas and Electric,
Commonwealth Edison, and Consolidated Edison.
The greatest degree
of geographical differentiation appears to be practiced in California.
These price differntials typically occur in the initial rate blocks.
One obvious characteristic of electricity pricing is the pervasive use of intra- and-inter-consumer price differentials.
An
inescapable consequence of differences in marginal costs of service,
price differentials are a necessary condition for allocative efficiency.
However, the abuse of such price differentials as discrimi-
natory devices is likewise a certain consequence of the profit motive
'
-under rate-of-return regulation if the commission is not vigilant.
18
In principle, economic regulation is intended to promote social
welfare by intervening in markets that, because of some inperfection,
do not yield the competitive outcome.
In practice, however, the
regulator's ability to replace the market outcome in an imperfect
market by a more efficient outcome is subejct to important
•
18.
J. Jurewitz, Towards a Positive Theory of Pricing Behavior in the
Regulated Electric Utility Industry, in Studies in Electric
Utility Regulation 121 (Cicchetti and Jurewitz 1975).
limitations. 19
First, the objective of regulatory agencies may
not be consistent with economic - efficiency
criteria.
It has been
argued that regulatory processes are often intended to insulate
consumers and
fir~s
from market forces and that such processes may
be supported even if efficiency losses are known to result from their
use.
In addition, norms such as fairness, and public participation
may be important components of regulatory objectives and may impose
requirements on the process by which regulators administer their
legislative mandate.
It may be necessary for instance, for price-
setting procedures to be highly structured and easily understood by
all- interested parties, even if this limits the regulator's flexibility in achieving economic efficiency.
A second limitation on the
regulator's ability to promote efficiency results from the information
she or he possesses.
It may be quite costly for the regulator to
otain as much information about a firm as its managers possess, and
this may impose further simplification and structure on the pricesetting process.
As a result of these limitations, the regulated firm may have
an opportunity to behave strategically in order to further its own
goals.
The informational limitations on the regulator and the pro-
cedures used to satisfy the process requirements of regulation can
create incentives for firms to alter their production and financing
decisions in an attempt to influcence the regulated prices and enhance
•
19.
Baron and Taggart, Regulatory Pricing Procedures and Economic
Incentives, in Issues in Public - Utility Pricing and Regulation
27 (M. Crew 198 .
00180
their profits.
If, for example, a regulator uses a pricing procedure
based on a firms inputs or costs, the- firm may have an incentive to
bias its choice of inputs in order to affect the regulated price. 20
As mentioned earlier, ·the costs of providing electricity and
customer's bills rose significantly during the 1970's resulting in
increased efforts in the United States to change traditional electricity - usage patterns.
Since the conclusion of the important and
forward-looking Madison Gas and Electric Company case in August 1974,
several state regulatorycommissions, utilities, and intervenors have
been analyzing the desirability and feasibility of implementing
time-of-day (TOO) pricing of electricity,21 and some state regulatory
commissions have directed electric utilities to implement TOO tariffs. 22
In addition, each state regulatory commission must consider and make
a determination by November 1981 concerning the electricity ratemaking standard of TOO rates in order to comply with the Public
Utility Regultory Act (PURPA) of 1978.23
Following is a brief review
of PURPA, which is part of the National Energy Act (NEA) of November
~978,
-.
with emphasis on provisions concerning time-of-day pricing.
20.
Id. at 2 8 •
21.
Time-differentiated pricing of electricity is an indirect form
of load management that prices electricity to reflect differences
in the cost of providing service by time of day and season of
year. Time-of-day pricing refelcts costs in a more accurate
manner than do traditional block-rate structures.
22.
See:
23.
See: Public Utility Regulatory Policies Act of 1978 section
111 and 115 (1978).
Wisconsin Public Service Commission (1974).
(13)
00181
After approximately eighteen months of debate and deliberation,
NEA was passed by the
u.s.
on November 9, 1978. 24
Congress in October 1978 and became law
At the signing of this energy legislation,
President Carter stated:
"Today we can rightfully claim that we
have a conscious national policy for dealing with the energy problems
of the present and also help us deal with them in the future."25
The NEA has five major parts:
Policy Act of 1978,
of 1978,
(1} the National Energy Conservation
(2} the Powerplant and Industrial Fuel Use Act
(3} the Public Utility Regulatory Policies Act of 1978,
(4) the Natural Gas Policy Act of 1978, and (5} the Energy Tax Act
of 1978.
Major PURPA provisions pertain to (1} rate-making standards
for electric-utility rate structures,
rates,
(2} cogeneration,
(4} aid to states and consumer representation,
(3} wholesale
(5} gas utilities,
(6) small hydroelectric facilities, and (7} crude-oil transportation
systems.
In addition, PURPA contains significant miscellaneous
provisions relating to the authorization of funding for the National
~~gulatory
Research Institute and clarification of natural-gas
transportation policies.
In order to attempt to partially solve the problem of rising
costs of providing electricity during the 1970's, Congress decided
that retail electricity rates should be structured to encourage the
following objectives:
u.s.
(1) conservation of energy supplied,
24.
See
25.
See U.S. Department of Energy (1979).
(2)
Department of Energy sections 111 and 115 (1978).
00t82
efficient use of facilities and resources, and (3) equitable rates
to consumers. 26
Now PURPA specifies that each state regulatory
commission should consider and make a determination concerning the
appropirateness, relative ·to the. above .t.hree purposes and applicable
state law, of implementing the following six rate-making standards:
(1) cost of service,
seasonal rates,
techniques.27
(2) declining block rates,
(3) TOO rates,
(4)
(5) interruptible rates, and (6) load-management
Also PURPA defines special or additional rules for
considering and making a determination concerning the following
rate-making standards:
cost of service, TOO rates, and load-management
techniques.28
With respect to the PURPA provisions relating to TOO pricing
of electricity, the features of reflecting costs of providing service
and cost-effectiveness considerations are emphasized in the legislation for each customer class.
As of November 1980, each state
regulatory commission must have begun the consideration process or
have established a hearing date for the consideration of TOO rates
-and the other rate-making standards with respect to each electric
utility for which i t has rate-making authority and to which PURPA
applies.29
By November 1981, each state regulatory commission will
have to finish the consideration process and make a
26.
deter~ination
See Public Utility Regulatory Policies Act of 1978 sections
111 and 115 (1978).
~
•
27.
Id., at section 111 d. For a detailed discussion of ratemaking standards and related matters in PURPA, see Electric
Utility Rate Design Study (1979 e).
28.
Id., at sections 115 a to c.
29.
Id., at section 112 b.·
00183
concerning the appropriateness of implementing time-of-day rate
-
-
structures and the other rate-making standards.30
utilities must follow a similar procedure.
Large nonregulated
In summary, the decision
concerning the appropriateness of implementing time-of-day rate
structures and other rate-making standards is the responsibility of
each state regulatory body based on state law, as supplemented by
specific provisions of PURPA.
The growth of commission involvement was dramatic in the
1970's, and was fueled in the latter years of the decade by the
passage of PURPA. The growing responsibilities of regulatory
commissions will require a significant increase in the qualitative
and quantitative strenghts of regulatory commissions.
To aid in the
search for these resources, regulators may find it advisable to
search for allies among those whom they all too frequently view as
enemies -- the regulated utilities themselves.
Direct experience
indicates clearly that progressive utility executives are keenly
aware of the need for regulatory staff competence, and are willing
to apply their often considerable influences to secure legislative
support of suitable financing mechanisms, more adequate salary levels,
and similar changes.
There is much vital work to be accomplished by
regulatory commissioners and their staffs, and their decisions can
indeed help shape the future in the public interest.
All too much
of their activity today, however, is directed -toward probes of past
~
events and the processing of current rate case filings, rather than
30.
Id.
00184
toward prospective review of the marketing, supply, facilities,
financial, and human resource plans of jurisdictional utilities.
It is in these latter areas where resources, talent, and ingenuity
are in the greatest need.
Moreover, as regulators increasingly focus their efforts on
the future, and move to an era of anticipatory regulation, it will
be vital for them to view the events and pressures of today in perspective, and to develope clear and consistent policies which will
create a more stable and predictable environment for rate payers
and jurisdictional utilities alike.
The creation of such an environ-
ment will require regulators to depart from past practices of focusing
on issues on a case-by-case basis, and will mandate the development
of clear-cut supply and demand projections and assumptions which
commissions will rely upon in reaching decisions for the future.
It
will also require that regulators share in the risks of erroneous
forecasts, and that all parties involved in the regulatory process
avoid useless second-guessing
_ID~stakes
and fault-finding when inevitable
are made.
To the extent it cay be comforting, state utility regulatory
commissions will not confront the challenges of the 1980's alone.
Given the importance of the issues commissions will be addressing
in the 1980's -- and their impact on various elements of our society
the number and diversity of intervenor groups, and the intensity
of their involve~ent in the regulatory process, will inevitably
increase.
Wise regulators of the 1980's will devote their efforts
to managing the difficult process of shared decision making.
Again, I emphasize that the most suitable approach for
regulators to rely on in facing the pressures of the 1980's is
to embrace the strategy of anticipating, rather than reacting to,
emerging issues and problems.
All too often regulatory bodies
must function without clear policy_ guidance from the legislative
bodies which have created them.
As one of the first tasks of this
decade, regulators should seek to ensure that statutes which they
must operate under contain firm declaration of legislative purposes
and intent.
Those responsible for regulatory direction should recognize
that their obligation to communicate effectively with the public at
large warrants renewed priority in the 1980's.
Regulatory leaders
must be prepared to convey bad news as well as good, especially
where the public may benefit by learning from official sources of
the reasons for escalating prices or reduced supply availability.
As the complexity of the regulatory task grows, the time is
quickly arriving where reappraisal of the job of commissioner is
~eeded.
The time has clearly passed when appointments to this posi-
tion could be based on the mere discharge of political obligation.
Given the difficulty of the decisions commissions will have to reach
in the 1980's, men and women of accomplishment must be attracted to
the public service.
Greater diversity of background will be called
for; experience in law and the political arena should be supplemented
by experience in ~ngineering, accounting, economics, finance, and
other disciplines.
Lessor amounts of regulator's time should be devoted to individual
case-by-case decision making.
It can be projected that the efforts of
00186
4
commissioners and staff are more lLkely to be channeled into:
{1) critical decisions regarding projections of future public
service needs and plans for meeting them:
(2) general assessments
of major external factors, such as capital market conditions and
trends; and (3) other proceedings designed to underly generic
regulatory policy with a solid analytical foundation.
This shift
is likely to lead regulators away from reliance on the adversary
hearing process, and toward much greater reliance on staff analyses
and studies, general infromational hearings, and other investigative
vehicles.
The burden of analytical support for regulatory decision
making is likely to grow rather than to diminish.
It will be
necessary to carefully define the logic and rationale for prospectively oriented policy decisions, to crystallize assumptions for
subsequent monitoring, and to consider how these regulatory decisions
may in turn influence those of consume-rs, jurisdictional companies,
and others.
The development of consistent approaches to this
process, which provide for reasonable participation by all parties
-concerned, should be under consideration now.
Regulatory staffs are likely to undergo the most marked transformation in the 1980's, as commissions urgently seek the resources
needed to address public interest needs in a timely and proficient
manner.
In planning for staff growth in the 1980's, a premium should
be placed on attracting to the public service individuals with the
ability to conceive, define, and appraise alternatives and to reach
judgments with confidence in an environment of uncertainty.
must also be expected to build a greater degree of permanence
00187
Efforts
into the regulatory complement, if the staff is to provide an
aspect of stability and continuity in the 1980's.
It is significant to recall that the use of the term "system"
implies the existence of an orderly, consistent, and integrated
methodology or function.
The regulatory landscape of the 1970's
was not heavily reinforced by
matters.
systematic approaches to vital
A major test of the management effectiveness of the
regulatory community awaits in the 1980's, and a critical determinant of the ability to meet this test will be the extent to which
more "orderly, consistent, and integrated'' approaches are taken
to the issues and problems of the 1980's.31
Regulatory reform has been in the air since the inauguration
of Ronald Reagan as President.
Initiatives from the White House
have indicated the importance which Mr. Reagan attaches to changing
existing regulatory procedures.
Shortly after taking the oath of
office the President announced the creation of a Presidential Task
Force on Regulatory Relief headed by Vice President George Bush.
A
60-day freeze on new regulations was ordered by the President while
the office of Management and Budget compiled a
list of proposed
regulations subject to revision, postponement, or elimination.
In
February all regulatory agencies were ordered to prepare a regulatory
impact analysis for each proposed rule.
Late in March a list was
released showing 50 regulations which would be reviewed .
•
31.
See Knapp, "Earthquakes and Aftershocks: The Regulatory
Management Landscape of the 1980's," Public Utilities
Fortnightly, Jan. 1, 1981 at 11.
00188
Strong interest in regulatory reform is also evident at the
other end of Pennsylvania Avenue.
-
Supporters of some form of
regulatory reform on Capital Hill constitute a clear majority in
both the House and Senate.
It is not difficult to understand the
popularity of proposals to curb present regulatory practices.
Murray Weidenbaurn, Chairman of the Council of Economic Advisers,
has demonstrated that regulatory costs imposed by the federal government on the private sector amounted to approximately $103 billion
in fiscal year 1979, a figure equal to about one-fifth of the federal
budget at that time.
Few would dispute that federal regulations
have contributed significantly to the cost of doing business.
Numerous hearings on the problem of federal regulation have documented
cases of overlapping and conflicting rules promulgated by different
agencies which compound the operational problems faced by businessmen.
Finally, cases of unelected bureaucrats disregarding legis-
lative intent and developing rules which go beyond the scope of
legislative intent have been recorded.
~f
Because congressional oversight
the Executive and independent agencies has not kept pace with the
growth of bureaucracy and the number of rules issued, a serious
imbalance has threatened the constitutional doctrine of separation
of powers between the Executive and Legislative branches.
Many legislative remedies have been introduced during the past
several Congresses, but no bill has ever come close to enactment.
~
However, with an·adrninistration strongly committed to regulatory
reform, the chances for passage of major legislation are much more
favorable than in the past.
That hearings have already begun in both
00189
houses of Congress is significant.
While passage is by no means
certain, the legislative process has begun early enough to allow
sufficeint time for enactment.
Support from the White House
combined with strong and unified backing of the business community
could make the difference.
Of all the measures before Congress, HR 1776, the Administrative
Rule Making Reform Act, introduced by Repesentative Elliott Levitas
and cosponsored by more than 200 House members, appears to have the
strongest support.
HR 1776 proposes steps for the reform of rule-
making procedures and authorizes a legislative veto of government
regulations by one house subject to review and rejection by the
other chamber.
Despite the impressive number of cosponsors, however,
the Levitas bill may have problems passing due to the legislative
veto.
HR 746, the subject of hearings before the Danielson subcommittee,
is the most important regulatory reform proposal to appear in the
House.·
Its major provisions are similar to the measure which the
'-
-House Judiciary Committee approved last year.
A regulatory analysis
designed to assess the costs and benefits of a rule prior to its
adoption
is required, and a final analysis is required upon promul-
gation o£ the regulation to jusitfy its terms, the analysis focusing
especially upon the economic impact of the rule.
Each agency must
publish a semiannual regulatory agenda indicating the rules it
intends to propo~e and the objectives of the rules under consideration.
Existing rules scheduled for review shall also be included on this
agenda.
Agencies are required to review all existing rules over a
0QJ90
ten-year period with instructions to discard unnecessary rules.
A two-house legislative veto by joint resolution is included.
tinally, the scope of judicial review is expanded significantly.
The presumption of validity for agency actions is removed, and the
courts are given the right to examine all aspects of an agency's
actions.
On the Senate side, S 890, the Regulatory Reduction and
Congressional Control
Act of 1981, introduced by Senator Harrison
Schmitt has impressive support and should make legislative progress.
This bill would make agencies accountable to Congress for both new
and existing rules.
The congressional review provision permits a
veto of government regulations by one house, subject to review and
rejection by the other.
Any member of Congress may introduce a
resolution of disapproval on any rule.
If committee action does
not occur, within forty-five legislative days, he may take the
matterdirectly to the floor of the chamber of which he is a member.
The bill also subejcts all existing rules to congressional review.
-Passage of a resolution of reconsideration would force an agency to
revise a regulation within 180 days.
Once rewritten, the rule would
be subject to the same review and disapproval procedures as new
regulations.3 2
Again, I would like to remind you that, with an
administration strongly committed to regulatory reform, the chances
for passage of major legislation is much more favorable than in the
past.
32.
•
See L. Smart, "Congress Begins Work on Regulatory Reform Bills,"
Public Utilities Fortnightly, May 7, 1981 at 37.
What has been the impact of regulation on electric utilities?
Regulation on electric utilities over the past decade has:
(1) Not provided sufficient revenues to prevent a
serious deterioration of the financial position of the
industry.
(2) Not granted rates of return that have kept up
with returns earned elsewhere.
(3) Hindered innovation and fostered shortsightedness.
(4) Kept price of service below economic cost, thereby
fostering a misallocation of economic resources and increasing
demand for power in a way that forced utilities to add to
plant and undertake the burden of unnecessary financing.
(5) Transferred income from the utility shareholder
(generally a small investor) to the consumer of electricity
(roughly two-thirds of which is purchased by industrial and
commercial users).
(6) Provided little long-term incentives for efficiency.
(7) In few jurisdictions spurred the development of
new concepts of pricing and service.33
The regulators need to get with it, to accept the economic
realities of this world, and to speed up rate cases, put all construction work in progress in the rate base, and to raise rates of
return.
......
The time has come to look at the industry's structure and
regulatory set-up.
Instead of pursuing that seemingly hopeless goal
of good regulation, maybe the country needs less regulation of the
elec~ric
utility business.
Total deregulation could conceivably be one answer.
However,
I don't believe the American people will ever permit unregulated
monopolies to set.their own rates.
•
33.
Should total deregulation
See L. Hyman, "Should Electric Utilities Be Deregulated?"
Public Utilities Fortnightly, Aug. 14, 1980 at 43.
00192
come to pass, nationalization of the utility industry would quickly
follow.
The free enterprise-system bas many problems to face in
the future, but none of them is more important than the proper
resolution of the methods by which we regulate our utility
infrastructure.
If the investor-owned utility complex is to survive in the
1980's, regulators will have to come to grips with the realities
of the marketplace.
Beyond question, they are going to find
themselves caught between a rock and a hard place.
Public outrage
against regulators caused by high rates will not be any more
virulent than the wrath which will be visited upon them for lack
of service.
All across the nation, utility companies are currently
deferring plants, cutting back on production, cutting back on
construction, cutting maintenance costs, and pushing hard for
increased productivity.
There is a limit, however, to what this
kind of effort can produce.
In the last ten years more effective regulatory tools have been
--developed than were developed in the previous forty years; nonetheless, as a general rule, a sufficient concern for the financial
well-being of the regulatory industry has not been demonstrated.
In too many instances today, interest coverage hovers on the brink
of inadequacy, and more than one company has had to divest itself
of significant portions of its assets in order to survive.
In light
of~the
above, it is important to recognize that there
are men and women of good will and intelligence on both sides of
the regulatory fence -- people who are aware that there is a
00!~3
continuing need for regulatory statesmanship of the highest order.
There is a present and continuing need for these people to come
together in order to secure for future generations the great benefits
which we now enjoy from our very efficient utility complex. 34
~fuether
are not the regulatory commission and the electric
utility industry will come together remains to be seen.
This
coming together may just determine whether or not there will be
light at the end of the tunnel.
34.
See E. Larkin, "A Debt to Tomorrow," Public Utilities
Fortnightly, Jan. 29, 1981 at 13.
OOJ~4