The politics of requesting: Strategic behavior and public utility regulation

Abstract

Extant models of public utility regulation assume that regulated firms make the same rate adjustment requests regardless of the political environment they will face during the rate case. Focusing on information asymmetries, the repeated interaction between the firm and the regulatory commission, and behavioral assumptions about the goals of regulators, a new model is proposed that assumes firms strategically and rationally plan their requests to respond to political and agency, as well as standard economic factors. An implication of the new model is that the effect of political factors, such as grassroots advocacy and regulator election, should be observed in request equations rather than in award equations where they are traditionally sought. This new model is tested using data from 54 telephone rate cases. The results indicate that firms do respond strategically to political factors (especially to regulator elections), and also to agency factors (such as workload), by increasing their requests. This partially explains a puzzling result in the literature and has implications for regulatory policy, interest group behavior, democratic institutions, and public management.