Effective Regulation or Not?

By Branko Terzic

https://www.brankoterzic.com/effective-regulation-or-not/

How does one measure the effectiveness of a regulatory agency? That question, after over 100 years of experience with public utility regulation in the United States still has no consensus answer.

Cary Coglianese, in an August 2012 OECD study “Measuring Regulatory Performance”, asserts that:

“Indicators can be grouped into three main types:

i) Impact (changes in the problem or other outcomes of concern);

ii) Cost-effectiveness (costs for a given level of impact);

and

iii) Net Benefits (all beneficial impacts minus all costly impacts).

However, even looking at these three indicators of the regulatory process misses the point that even the poorest regulator can benefit from a confluence of excellent utility management, favorable economic conditions, the introduction of new cost reducing technologies and progressive regulatory laws.

For the electric industry perhaps J. Stern and S. Holder’s six indicators to assess performance of regulatory agencies (“Measure of Effective Regulation” 1999) will suffice:

Clarity of roles and objectives

Autonomy of the regulator

Public participation

Accountability of the regulator

Transparency of the process

Predictability of the outcomes.

Noting that these line up nicely with the frequently cited Moody’s Investor Service Rating Methodology which asserts that “investor confidence is the outcome of a regulatory process is a major factor in risk assessment” and that the “Characteristics of top-rated regulatory environment” include:

Fully developed regulatory framework

Long track record of predictability and stability

Very high expectation of timely recovery of costs and investments

It would be nice if all our regulators met all these criteria. I doubt that’s the case. Perhaps we are even at the point of too much regulation particularly when there are now claims of “parity” between distributed generation and central station generation and the threat of real competitiveness.

Harvard historian Niall Ferguson warns about the pitfalls of excessive regulation in Degeneration by asking “…how far very complex regulation has become both the disease of which it purports to cure, distorting and corrupting both the political and economic process.” Here he is specifically talking about the financial regulations in effect during the 2008 crisis. “Banks were the key to the crisis and banks were regulated” Ferguson reminds us, later observing that “Lurking inside of every such regulation is the universal law of unintended consequences.”

That last point certainly true in the case of the consequences of the rate “coupling” which took place in the 1980’s following PURPA and the need now to reconfigure rates to accommodate costs incurred by distributed solar customers.

An observation of Ferguson’s on financial markets that “Regulation has become dysfunctional to the point of increasing the fragility of the system” could well be applied to government design of wholesale power markets in the US and Europe. Try as I can, I still cannot find in my old economic textbooks a graph of supply and demand where the price goes negative. Any recommendations?

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