"regulatory Capture": Sources and Solutions
| Publication year | 2014 |
"Regulatory Capture": Sources and Solutions
Scott Hempling
. . . [T]he Commission has claimed to be the representative of the public interest. This role does not permit it to act as an umpire blandly calling balls and strikes for adversaries appearing before it; the right of the public must receive active and affirmative protection at the hands of the Commission.1
As an advisor, practitioner, and expert witness in the field of public utility regulation, I have observed policymakers paradoxically concerned that using their powers risks losing their powers. Here are two examples.
"We'll lose our jobs": In one state, a major electric utility repeatedly resists the agency's orders by invoking federal preemption, often groundlessly. The utility wanted its rights and obligations determined by the Federal Energy Regulatory Commission (where the state agency was a mere intervenor) rather than by the state agency (which had the power to issue and enforce orders). Under a proper reading of the federal-state jurisdictional relationship, the state agency is parent setting the expectations; while the utility wanted to drag the agency to FERC for family counseling.
In a competitive market, an unresponsive seller loses its customer. A utility has a monopoly franchise, but it comes with no lifetime lock. Why not let other, more responsive companies compete for the role? Some states have done exactly that: Hawaii, Maine, Oregon, and Vermont have transferred the traditional utility's energy efficiency functions to an independent, commission-regulated entity, selected competitively. The risk of losing a century of steady income would jolt any incumbent into responsiveness.
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But this agency reaction to this possibility was immediately and emphatically negative: "If we tried that, we'd all lose our jobs." Refraining from picking the best company for a job for fear of losing your job—that's conceding a lot. And note the asymmetry: When a regulated utility is the entity proposing to change the franchisee (such as when it is merging with or being acquired by an out-of-state entity), regulatory commissions routinely approve the transaction, with no fear of losing their jobs. But when the initiator of franchise change is the agency, there is fear of job loss. When the motivation for regulatory decision is job-saving rather than public-serving, we have "regulatory capture."
"They're captured and there's no rescue": Another state suffered from an electric utility's frequent outages. A legislator I know blamed the state regulatory commission for failing to set standards and punish shortcomings. I suggested he get the commission more support—more staff and expertise, better salaries, more political cover for its tougher decisions. A stronger commission would have more credibility with which to create a culture of performance. That credibility would be even higher if the commission had the option of replacing a non-performing utility.
The legislator objected: "That's not politically possible. The legislature has no stomach for more spending." Yet the outage had cost state residents, according to this legislator, hundreds of millions of dollars in lost business and freezer spoilage alone. How was it not "politically possible," albeit with patient, risk-taking leadership, to spend, say, 5 percent of that amount to reduce the probability of recurrence by half? It's all from the same pockets— customer pockets. Why give ground to the short-term cost-cutters where spending saves long-term money? In any event, he added, "It's useless, they're captured." Using "capture" as an excuse was itself a form of capture.
From these two examples, conscientious regulators can define "regulatory capture," recognize its warning signs, and work to resist it.
A. Definition
"Regulatory capture" is a ringing phrase, too casually used. But because it is a hyperbolic phrase, it is too readily dismissed. With a careful definition, regulatory capture can be anticipated, detected, and resisted.
Regulatory capture does not include illicit acts—financial bribery, threats to deny reappointment, promises of a post-regulatory career. These things all
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have occurred, but they are forms of corruption, not capture. Nor is regulatory capture a state of being controlled, where regulators are robots executing commands issued by interest groups.
Regulatory capture is neither corruption nor control. Corruption and control are actions of the regulated entity. Regulatory capture is characterized by the regulator's attitude, not the regulated entity's actions. A regulator is "captured" when he is in a constant state of "being persuaded": persuaded based on a persuader's identity rather than an argument's merits. Regulatory capture is reflected in a surplus of passivity and reactivity, and a deficit of curiosity and creativity. It is evidenced by a body of commission decisions or non-decisions—about resources, procedures, priorities, and policies, where what the regulated entity wants has more influence than what the public interest requires. The active verb "capture" signals an affirmative effort, to take someone captive. But the noun "capture," and the passive verb form "to be captured," signal a state of being. One can enter that state through one's own actions or inactions. One can allow oneself to be captured. One can assist, and sustain, one's own captivity.
If regulatory capture is a state of being, assisted and sustained by the captive, what roles are played by others? Regulatory capture is enabled by those who ignore it, tolerate it, accept it or encourage it: legislators who under-fund the commission or restrict its authority, presidents and governors who appoint commissioners unprepared for the job, human resource officials who classify staff jobs and salaries based on decades-old criteria unrelated to current needs, intervenors who treat the agency like a supermarket where they shop for personal needs, and who treat regulatory proceedings like win-loss contests rather than building blocks in a policy edifice. These actions and inactions feed a forest where private interest trees grow tall, while the public's needs stay small.
B. Warning Signs
If to be "captured" is to be in a constant state of being persuaded, by persuader identity rather than merits, what are the warning signs? What are the conditions and practices that contribute to and perpetuate regulatory capture?
No vision, no priorities: In a captured agency, its leaders don't ask the big questions: What products, services and quality standards best serve the public? What price levels are necessary, and sufficient, to support those products, services, and standards? What market structures will yield the desired results?
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And within those market structures, what corporate structures and practices will induce executives and employees to produce those results?
Lacking vision and priorities (and a work plan to carry them out), the...
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