Economic regulation--the lights are still on: a view from the inside.

Author:Haar, Burl

In 2006, state utility regulators gathered, as they had regularly since 1995, at a Commissioners' Summit to discuss strategic issues. Several important issues were high-lighted. However, for the first time, defining the public interest was identified as a major challenge. Participants expressed confusion about knowing who the public is, and therefore, whose interests they are supposed to protect; and, frustration that everyone that comes before them lays claim to the public interest, even though positions are often diametrically opposed (National Regulatory Research Institute (NRRI) 2006). Although public interest regulation has had identity issues since its inception, this confusion is noteworthy because it deals with the raison d'etre of the institution at a time of great change. The following observations are directed at the sources of this confusion and hopefully provide guidance going forward.

The Public Interest Concept

The concept of public interest is grounded in English common law and carried over to U. S. Court decisions. (1) These rulings held that certain industries, because of their essential nature and the presence of market power, should not be left to the unregulated market. Critical service industries involving significant economies of scale and a direct physical connection to end-users were included in this category. Given the market power inherent in these industry characteristics and their tendency to lapse into unstable oligopoly, regulations governing entry, prices and conditions of entry were established to protect the public interest (Kahn 1970).

In practice, public interest regulation has been an evolving concept. Courts deliberately crafted the concept to allow flexible interpretations and to withstand changing conditions. This need for stability and adaptability also shaped the institution charged with safeguarding the standard, i.e., commission public interest regulation, which has proved remarkably adaptable (2) (Jones 2006). However, the issue for regulators has always been whether these adaptations do, in fact, protect and promote the public interest (Gorak 2002). The concern expressed at the 2006 Summit suggests this quest has become more challenging.

Why this Confusion Now?

Summit participants offered clues about the nature of this strategic issue. The overriding factors identified were a) the pace of technology change; b) difficulty in balancing often competing policy goals, particularly, the need to promote competition while keeping rates affordable and providers financially viable; and c) how to weigh parties' perspectives (NRRI 2006).

Technological Change

More than just the general onslaught of technological change, which became very pronounced in the "Technology Revolution" of the 1990s, the convergence of technologies has blurred the line between regulated and unregulated services (Link 2002). The "triple play" in communications involves the blending of voice, data and video services over one network. Broad regional grid control through regional transmission organizations (RTOs) treats generation, transmission, and (soon) demand response essentially as substitutes, and has transformed electrical services into a wholesale commodity, to be bought and sold over regional markets.

These major convergences have blurred the lines of state commission authority even while the public still holds regulators responsible for service quality and prices (3) (NRRI 2006).

Political Changes

The 1990s also brought intensified partisanship in politics. Partisan politics has permeated our culture, from popular media to religion, and has accelerated the emergence of diverse activist groups who are fueling and funding the policy debates (Hartmann 2006). This trend has lead to a proliferation of special interest groups in commission proceedings and has prompted the political bodies of government to overshadow the traditional realm of regulators.

Broader and more diverse advocacy has benefitted commission decision-making by bringing into sharper focus the full dimensions of decision issues. However, it also has meant that balancing interests is far more sensitized to the quality of the representation at the podium. This would be, unconditionally, a good result if the quality of that representation was reasonably balanced. However, Summit participants indicated that is not always the case; and specifically expressed concern about the waning effectiveness of consumer advocacy. (4) A troubling result is that simply balancing interests does not necessarily mean that the public interest is assured; it may simply allow shifting of costs to the least prominent party or interest (NRRI 2006).

Interest groups have also found relations with political bodies, where trading for votes holds sway, more manageable than with regulatory bodies, where building a solid record and strength of analysis are needed. Moreover, new alliances among traditional opponents (e.g., utilities and environmentalists) can, as a result of their union, lay claim to represent the public interest; which, of course, further enhances their political currency (Trebing 2007). In addition, political leaders, spurred by intensifying partisanship, have found the political capital in regulatory issues appealing. Those prone to limit government tend to promote deregulation; those prone to intervention tend to promote policies that over-ride regulatory discretion. As a result, the long-standing "marriage of convenience" between political and regulatory...

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