Evolutionary stakeholder theory in action: Adaptation of public utility regulation in the post‐OPEC world

• DOI: http://doi.org/10.1111/basr.12209
• Author: Karl A. McDermott
• Date: 01 June 2020
• Published date: 01 June 2020

Bus Soc Rev. 2020;125:203–223.

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203

wileyonlinelibrary.com/journal/basr

Received: 7 May 2020

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Accepted: 11 May 2020

DOI: 10.1111/basr.12209

ORIGINAL ARTICLE

Evolutionary stakeholder theory in action:

Adaptation of public utility regulation in the

post-OPEC world

Karl A.McDermott

© 2020 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,

MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Department of Accountancy, University of

Illinois Springfield, Springfield, IL, USA

Correspondence

Karl A. McDermott, University of Illinois

Springfield, Springfield, IL 62703-5407,

USA.

Email: kmcde3@uis.edu

Abstract

This article extends the Humean example of evolutionary

stakeholder theory introduced in Kline and McDermott

(2019). In that article, it was established that the Cost of

Service Regulation (COSR) rules created by regulatory

commissions, courts, and legislation was an example of

evolutionary stakeholder theory. Ultimately, the Supreme

Court decision in the Hope Natural Gas case established

that it was not the method, but the result reach that was im-

portant. If the result reach balanced the interests of stake-

holders then the outcome was just and reasonable. Kline and

McDermott (2019) also established that the COSR process

was rather robust in terms of stakeholder participation. The

purpose of this article is to extend the analysis to examine

one of the most turbulent periods in COSR's history: the

Post-OPEC oil crisis of the 1970s–1980s. The effects of this

period called into question the efficacy of the COSR process

and led, as evolutionary stakeholder theory predicts, to a

series of engagements by stakeholders to modify the rules

of the process to achieve a better balance in the publics'

interest. While adjudicatory in nature, the COSR process

enabled cooperative solutions to redress the imbalances cre-

ated by the OPEC oil shocks, improvements in information

gathering, processing and decision-making were all prod-

ucts of the evolutionary stakeholder process that regulators

engaged in with stakeholders.

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MCDERMOTT

1

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INTRODUCTION

This article extends the Humean example of evolutionary stakeholder theory introduced in Kline and

McDermott (2019). In that article, it was established that the Cost of Service Regulation (COSR) rules

created by regulatory commissions, courts, and legislation was an example of evolutionary stake-

holder theory. Ultimately, the Supreme Court decision in the Hope Natural Gas case established that it

was not the method, but the result reach that was important. If the result reach balanced the interests of

stakeholders then the outcome was just and reasonable. Kline and McDermott (2019) also established

that the COSR process was rather robust in terms of stakeholder participation. The purpose of this

article is to extend the analysis to examine one of the most turbulent periods in COSR's history: the

Post-OPEC oil crisis of the 1970s–1980s. The effects of this period called into question the efficacy

of the COSR process and led, as evolutionary stakeholder theory predicts, to a series of engagements

by stakeholders to modify the rules of the process to achieve a better balance in the publics' interest.

While adjudicatory in nature, the COSR process enabled cooperative solutions to redress the im-

balances created by the OPEC oil shocks, improvements in information gathering, processing and

decision-making were all products of the evolutionary stakeholder process that regulators engaged in

with stakeholders.

The article is organized as follows: In Section2, the core aspects of evolutionary stakeholder the-

ory are reviewed. Section3 briefly reviews the central role that public utilities play in the structure

of our society and the reasons why regulation of these businesses is so pervasive. The specific role of

electricity as an essential service is addressed in Section4, the dependence on electricity was as much

a political policy decision as anything else and this choice ran into significant difficulties in the 1970s.

Section5 reviews the core aspects of the COSR model employed to manage the regulatory contract be-

tween society and the utility. This model was fundamentally designed to address incremental changes

in costs and prices. The Crisis of the 1970s–1980s produced changes in costs of a magnitude here-

tofore never addressed by the COSR mechanism. It was this stress that led to stakeholders taking the

actions necessary to modify COSR. Section 6 examines the crisis period and the evolutionary actions

taken by stakeholders and the regulators to address the perceived failure of COSR. The results of the

stakeholder revolution and the modifications made to the traditional regulatory method are discussed

in Section 7. Section 8 concludes with a summary of our findings and some observations.

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EVOLUTIONARY STAKEHOLDER THEORY

Kline and McDermott (2019) defined evolutionary stakeholder theory as:

First, the normative force of rules comes from the rules serving the general interest. Second, the

actual selection of rules that serve the general interest arises from how people actually solve problems,

which is the rule formation will be evolutionary. Third, how people actually solve problems is often

not rational in that the specific solution is not determined ex ante by conceptual models of ideal or

maximizing rationality, but only that these solutions allow people to capture gains from cooperation.

The subsequent rules that arise from these solutions are also, themselves, often not capable of post hoc

rational justification where “rational” means either deductively logical, directly flowing from pure

reason, and/or being chosen by ideal rational actors behind some form of the veil of ignorance (Evans

& Evans,2014; Freeman,1994; Rawls,1971).

Fourth, there will be a means or method or forum for communication where interested parties are,

and can be, made aware of how others are solving these problems. Agents need not possess perfect