Sponsored and written by Chairman Mark Sievers of the Kansas Corporation Commission
In 1971, Richard Posner observed that utility regulation is not focused on the control of market power or calculation of the cost of service, but rather, is focused on fiscal “taxation” policies that seek to maintain rates and structures that would not persist in a competitive environment much like taxes subsidize a host of social programs. (R. Posner, Taxation by Regulation, 2 Bell J. of Econ. & Mgt. 22 (1971).) He cited an example of how the FCC maintained and subsidized international telegraph service and rates long after technological changes made telegraph service utterly obsolete.
Subsidies play a central role in utility regulation, often broadly taking the form of a regulatory inquiry into “who should pay for this program?” Subsidies in utility matters take the form of: (1) explicit subsidies focused on specific programs; (2) allocations of fundamentally unattributable common costs among customer classes and jurisdictions; (3) restrictions on entry and exit from markets that shelter firms from competition; (4) the determination of prudent expenses, the determination of a just rate of return and the development of depreciation expenses which allocates the recovery of expenses and economic risk between consumers and investors and between current and future generations; (5) the exercise of the power of eminent domain by utilities; and, (6) rate designs to incent certain behaviors or advance social objectives at the expense of some group of customers.
There are four philosophical areas that I urge practitioners to consider when analyzing subsidies in utility cases:
- Ethics of Coercion. Subsidies involve force. Subsidies often invoke the coercive power of government to force someone to buy services or contribute towards something that they would not willingly buy or contribute to for the benefit of someone else. When is such coercion just?
- Picking Winners and Losers. Subsidies are how government picks winners and losers. What gives appointed officials at administrative agencies – like me at a utility commission – special expertise to enable them to best pick the winners and losers? Is there any reason to believe that lawyers making legal arguments in the adversarial litigation process or legislators enacting laws in a political environment will iterate to the best allocation of resources in society?
- Subsidies Enjoy Eternal Life. Once subsidies are established, it is difficult to change them even after the policy rational for their creation has disappeared. Adherence to precedent in the adversarial system blocks change in subsidies; lobbyists who protect special interest subsidies block statutory changes. Subsidies often become entitlements.
- Who Should Determine Societal Policy? It is common for utility regulators to be placed – willingly or unwillingly – in the role of determining social policies and implementing social programs that elected officials are unwilling to address. If the elected legislature is unwilling to devote public tax funds to a particular social program, is it proper for appointed utility commissioners to override the legislature’s inaction and use utility money to establish and maintain that program?