Public Utility Regulation Research Articles

The Role of public utility regulation: oversight or onsite?

Brief commentary by Edward L. Flippen (Partner, McGuireWoods LLP; Lecturer in law, University of Virginia Law School; Distinguished Senior Fellow, George Mason University School of Law) on regulation in the United States of public utilities such as electric and gas utilities. Published in Amicus Curiae – Journal of the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies. The Journal is produced by SALS at the IALS (Institute of Advanced Legal Studies, School of Advanced Study, University of London).

How the Filed Rate Doctrine Wreaks Havoc With Energy Market Development and Policy ... And What Courts Can Do About It

The filed rate doctrine is a venerable doctrine of public utility regulation. When a court applies it - and courts frequently do - the doctrine serves as a litigation shield for regulated utilities. Federal courts invoking this shield refuse to exercise jurisdiction over an alleged violation of antitrust, tort or contract claim whose resolution would require a departure from a utility's filed rate. Like many venerable legal rules, the filed rate doctrine is rarely questioned. For over a century, it has served many important purposes. However, with deregulated wholesale electric power markets at the federal level and various degrees of deregulation across the states, both the doctrine's continued applicability and usefulness are suspect. Moreover, as recent examples in the industry suggest, presumptive application of the filed rate doctrine by both firms and courts can cause affirmative harm for energy market development and policy. For example, a recent U.S. District Court decision in Texas applied the filed rate doctrine in an astonishingly broad manner, precluding antitrust claims against energy suppliers in the deregulated Texas wholesale power market and leaving those harmed by market abuses without any legal or administrative remedy. The Essay draws on examples such as this to illustrate the serious need for reassessment of the doctrine by federal courts in the energy context. It is argued that both courts and litigators have at their disposal ways of lowering the filed tariff shield to allow more efficient energy markets to develop, better furthering the goals of energy policy.

From Municipal Socialism to Public Authorities: Institutional Factors in the Shaping of American Public Enterprise

In 1914 Daniel Hoan, the socialist city attorney of Milwaukee, pronounced regulation of public utilities a “complete fizzle.” Hoan's conclusion was based on years spent battling the imperious Milwaukee Electric Railway and Light Company with the limited legal tools at the city's disposal. He argued that even in Wisconsin, where regulatory agencies were at their most efficient and honest, it was impossible for public utility commissions to force good service at moderate cost from investor-owned companies. Commissioners would only push so far, realistically fearing they might drive private capital out of the state. Thus, in Hoan's opinion, the only sensible course was “to secure the democratic control of collectively owned property.” Despite this conviction and his astonishingly successful political career—spanning thirty years as an openly socialist public official, including twenty-four as Milwaukee's mayor—he retired from politics in 1940 having socialized only a stone quarry and the city's streetlights. As with many other local socialist officeholders in the United States, Hoan left a robust legacy of honest, efficient, and humane administration. But when it came to expanding public ownership, his record was meager.1

The Institutionalist approach to public utilities regulation

Harry Martin Trebing is at the forefront of the debate on the climate of deregulation which has encompassed industries ranging from public utilities to mass transportation. These articles that assess Trebing's theories on public utility regulation while examining his contribution to the field.

Regulation of Public Utilities under Asymmetric Information

We consider the relationship between a localcommunity and a private operator in charge ofthe water utility. An important feature of themodel is the possibility of water networklosses that are costly to the operator. Wecompute the first-best and asymmetricinformation solutions to the optimal contract,with private information on the operator'stechnology. Based on an econometric estimationof production cost and water demand for a panelof French local communities, we simulate theoptimal contract solutions and show thatasymmetric information has importantconsequences for the regulation of water publicutilities.

Les instruments juridiques de la protection des intérêts diffus et des biens collectifs :

SUMMARY LEGAL INSTRUMENTS FOR THE PROTECTION OF DIFFUSE INTERESTS AND COLLECTIVE GOODS : THE ROLE OF PRIVATE ACTORS AND THE RETURN OF PUBLIC POWER This paper starts with the presentation of a few venues for a research programme. Contemporary and comparative legal history could try and find out more about the correlation between globalisation, regionalisation (especially European integration) and the loss of impact of notions such as the general interest as a standard for legislators and judges, and their substitution by more sophisticated techniques. The most promising fields to be covered appear to be the regulation of public utilities, environmental law, and the rules on liability relating to the exercise of public authority. The paper then tries to examine to what extent the traditional mechanisms of diplomatic protection remain central in the adjudication of global transnational and international issues. National governments, and especially Foreign Ministries or Trade Representatives continue to play a major role in representing interests, thus limiting access to global adjudication to those interests who are able to directly obtain it on the domestic level. A comparison between Section 301 of the 1974 US Trade Act and the 1994 EU Trade Barriers Regulation draws attention to the specific advantages of mechanisms that are being built and implemented at regional rather than domestic level. The paper then tries to deepen the analyses of the issues concerning access to justice in the context of globalisation : to what extent can remedies be made available to individuals and for the protection of diffuse interests ? The experiences of the EU judicial system on the one hand, and,on the other, with the recently adopted Arhus Convention on access to information, public participation in decision-making and access to justice in environmental matters show how domestic judiciaries can be involved in becoming the judges of globalisation issues. Rather than focusing on establishing global institutions for the solution of legal issues, thinking about how to relate the institutions of different legal systems to one another appears to be a promising way forward.

The National Civic Federation and the making of a new liberalism, 1900-1915

Introduction Inside the National Civic Federation Defining a New Liberalism (By What It Was Not) Gender and the Making of a New Liberalism Foreign Immigration and the New Liberalism The Political Economy of Public Utility Regulation Testing the Limits of Federalism Conclusion Bibliography Index

The 2002 Veblen-Commons Award Recipient: Edythe S. Miller

It is always a great pleasure to recognize the recipient of the Veblen-Commons Award since this is the highest honor that our association can bestow. This year's award is particularly significant because its recipient, Edythe S. Miller, is an excellent representative of those dedicated institutional economists who combine an understanding of the discipline with dedicated public service to promote the general welfare and in so doing expand the content and nature of institutional economics. If one focuses on that subset of institutionalists who have dealt with the public regulation of business in energy, telecommunications, and transportation, it is possible to argue that those who have been most successful have been able to satisfy three conditions. These are (1) a scholarly appreciation of the underpinnings and rationale of institutional economics, (2) a major commitment to public service, and (3) an ability to employ institutionalist tools to forecast the long-term consequences of specific public and private policies. Success in meeting these conditions will provide new insights into the driving forces shaping the economy far beyond any understanding provided by traditional mainstream economics. It is an easy task to demonstrate that Edie Miller has met these criteria in an exemplary fashion. She has a distinguished publication record, with over forty-five papers and comments covering the landscape of institutional economics. As a tribute to her breadth of interest, she not only covers many of the issues associated with public utility regulation but also such diverse topics as the economics of poverty; the philosophy, methodology, and theory of institutional economics; the instrumental efficiency of social value theory; and Veblen and Commons and the concept of community. About one-half of her publications have dealt with different dimensions of economic regulation. In particular, she is concerned with the consequences of market concentration and the opportunities that this concentration affords for the exercise of economic and political power. It follows, therefore, that much of her writing is highly critical of the neoclassical economists' simplistic adaptation of the competitive model to the unique characteristics of the public utility and transportation industries. She is equally critical of those who accept a naive form of Schumpetarian dynamics in which technology is assumed to sweep away all barriers to competition. With respect to the latter, Edie

The Pig in the Python: Is Lumpy Capacity Investment Used and Useful?

A recurring issue in the regulation of public utilities is whether the firm should be permitted to recover the cost of particular assets through its allowed rates. The traditional standards have been the backward-looking prudency test and the forward-looking used-and-useful test. Under the latter, the utility may recover the cost of a particular asset, including a competitive return on that capital, if the asset is actually used by the utility and is useful in providing service to consumers. The option value of excess capacity helps to explain the difference between foresight and hindsight models for the bearing of market risk in the regulated network industries. We provide an economic answer to the question, When is an investment beneficial? A utility's investment in seemingly excess capacity confers an immediate option on consumers, an option having substantial economic value. In that sense, excess capacity is a capital investment that not only is currently used by the utility, but also is currently useful to consumers. Excess capacity is a form of insurance for consumers to protect them when demand unexpectedly surges, supply unexpectedly collapses, or both occur simultaneously. But a regulator's view of whether the investment in a particular asset is used and useful is limited by her personal experience and the institutional memory of the regulatory body. To borrow from the language of statistics, that personal experience and institutional memory aids the regulator in making in-sample predictions of whether consumers will, over some relevant period of time, indeed exercise the option inherent in the utility's excess capacity. That experience, however, provides little if any guidance about out-of-sample market conditions, such as the California electricity crisis of 2000-01. Yet it is especially for such outlier events that insurance confers its greatest advantage on the insured-in this case, the very consumers whom public utility regulation exists to protect.

Incentive Regulation and Competition in Public Utility Markets: A 20-Year Perspective

Over the last 20 years, incentives in general and price caps in particular have breathed new life into public utility regulation. Price caps successfully combine incentives for cost reduction with incentives for more efficient pricing. These properties also facilitate opening public utility sectors to competition. Relatively tight price caps likely imply the right amount of competition, when the underlying natural market structure is unknown. While price caps make a regulated incumbent competitively more aggressive, this aggression is likely to improve on the unregulated outcome. Potentially anticompetitive behavior by the incumbent has led to regulation of essential inputs on the basis of benchmarked costs. Benchmarked costs should evolve into price caps for essential inputs and eventually lead to partial deregulation of end-user prices.

The Fairness Criterion in Public Utility Regulation: Does Fairness Still Matter?

(2001). The Fairness Criterion in Public Utility Regulation: Does Fairness Still Matter? Journal of Economic Issues: Vol. 35, No. 1, pp. 153-172.

After privatization: regulation of Peruvian public utilities

After privatization: regulation of Peruvian public utilities

Understanding Institutional Economics: 1918–1929

All attempts to define American institutionalism, whether in terms of a set of key methodological or theoretical principles or in terms of the contributions of the three generally accepted “founding” figures of Thorstein Veblen, Wesley Mitchell, and John R. Commons, have run into a problem with the apparent disparities within the movement. In terms of the three “founders” there are obvious and quite dramatic differences between the methodologies and theoretical directions of the three men. Veblen is associated with an evolutionary approach, a key distinction between pecuniary institutions and technological or industrial requirements, and a biting critique of orthodox theory and business practices; Mitchell with quantitative methods and detailed research on business cycles, an approach he established at the National Bureau of Economic Research (NBER); Commons with documentary histories, work on labor issues and public utility regulation, and an analytical scheme emphasizing the evolution of legal institutions and processes of dispute resolution. The same problem shows up with more explicit types of definition that often seem to capture only some parts or aspects of the movement and not others, or are so broad as to lack much specific content. Institutionalism easily appears as incoherent, as little more than a set of individual research programs with nothing in common other than a questioning of more orthodox theory and method. Thus, Mark Blaug has stated that institutionalism “was never more than a tenuous inclination to dissent from orthodox economics” (Blaug 1978, p. 712), and George Stigler has claimed that institutionalism had “no positive agenda of research,” “no set of problems or new methods,” nothing but “a stance of hostility to the standard theoretical tradition” (quoted in Kitch 1983, p. 170). This view still finds wide currency— for example Oliver Williamson has recently argued that “unable or unwilling to offer a rival research agenda, the older institutional economics was given over to methodological objections to orthodoxy” (Williamson 1998b, p. 24; see also 1998a).

Privatization South American Style

Privatization South American Style focuses on the politics of privatization in Argentina, Brazil, and Peru. It examines both the micro and macroeconomics of achieving privatization, the policy measures introduced, and factors affecting the implementation of privatization. The political dimensions of privatization are analysed in order to explain the variations in national success in formulation and implementing privatization programmes. The author argues that evidence suggests that national governments as planned, and that rarely implement most divestiture policies from a technical standpoint, privatization is a learning process that evolves through trial and error. It also examines the apparently 'unconventional' methods used by the governments of Argentina, Brazil, and Peru to achieve privatization Comparative in its approach, the book seeks also to shed light on the nature of privatization in countries throughout the developing world. The book more generally argues that poorly designed privatization policies may have future serious implications on issues such as the rule of law, and the regulation of public utilities.

Appointed Courts, Elected Courts, and Public Utility Regulation: Judicial Independence and the Energy Crisis

This paper investigates the importance of variations in judicial institutions after a ‘shock’ has unraveled a regulatory status quo. State court decisions involving utility regulation are examined. Appointed state courts are generally agreed to be more independent than elected state courts. Before 1970, the primary participants in the process of utility regulation (and thus its largest beneficiaries) were the regulated firms and their commercial customers; afterwards, utility regulation increasingly accommodated consumer groups as well. Certain scholars have proposed that independent courts help keep administrative agencies from deviating from the original wishes of their political principals, and thus might be expected to slow down such changes in regulatory approach (which occurred with few alterations to the governing statutes). Other scholars have proposed instead that independent courts can decide as discretion dictates, and may thus lead such changes. The results of this analysis provide support for the latter view: controlling for other factors (such as partisan affiliation), more independent appointed courts sided more often with consumer groups while less independent elected courts sided more often with regulated firms and their large commercial customers.

Competition and Public Service Obligations: Regulatory Rules and Industries Games

The introduction of competition in regulated industries may have positive or negative side‐effects on the provision of collective goods or services. The paper shows that these effects are closely related to two associated elements: the industrial strategies developed by utilities and the regulatory environment within which they operate. Regulatory rules and corporate strategies influence the treatment of public service obligations. This raises a major issue regarding the regulation of public utilities. To reduce the drawbacks of the introduction of competition, it is necessary to set regulatory rules that allow the implementation of market configurations enabling public utilities to follow a public service orientation rather than a pure market‐based approach.

Public Utility Regulation in the US and Asymmetric Return Responses to Positive and Negative Abnormal Earnings

This article focuses on regulation and variation in rate structures to investigate asymmetric return responses to positive and negative abnormal earnings. The abnormal earnings (AE) metric is measured as the difference between the actual profit rate and the maximum allowed profit rate, scaled by the beginning-period price. The analysis is motivated by the anticipated asymmetry in the information contents of positive and negative AE induced by existing rate structures which permit utilities to recover below normal profits but allow them to retain abnormal profits. Accordingly, negative AE is expected to be largely transitory and price-irrelevant whereas positive AE is expected to persist and be price-relevant. The results reveal significant asymmetry in return responses to positive and negative AEs. Specifically, the magnitude of return responses is larger for positive than for negative AEs. The results further show variations in the magnitudes of price responses across regulatory structures.

Privatization and Government Regulation of Public Utilities: Just and Reasonable Return – The Case of TANESCO.

The inefficiency of public utilities undoubtedly contribute to economic problems in Tanzania. Privatization has increasingly become an alternative to addressing the fundamental problems of inefficiency, and as a solution for reducing the heavy burden on the national budget during times of economic crisis. The purpose of this paper is to consider the traditional issue of Just and Reasonable return, as an alternative of public interest, were natural monopolies such as TANESCO to be privatized. African Journal of Finance and Management Vol.7(1) 1998: 33-38

Stock‐price reaction to equity issues of utilities: the influence of regulatory climate

Regulation of public utilities is pervasive in any modern economy. Regulation is designed to overcome the deficiencies of market discipline. The decisions of a regulatory agency have impacts for all parties concerned, namely, consumers, management, investors, and community. The economic impact of a regulatory agency has been deeply analyzed. Many researchers have studied the stock-price reaction to announcements of new issues of industrial and utility companies. We examine the stock-price reaction to the announcements of new equity of utilities attempting to operationalize several theoretic models explaining this reaction. Using an event-study method, this examination is conducted while explicitly controlling for the regulatory climate under which these utilities operate. The main findings are: (1) the reaffirmation that the price reaction of stocks of utilities is negative; and (2) no significant influence of regulatory regimes on the price reaction was detected. The second finding is quite unanticipated Some speculative explanations are offered for the absence of impact of regulatory climate. It appears that stock market participants are sophisticated enough to do their own ‘due diligence’ and do not consider the overseeing by state public service commissions as relevant for stock valuation. © 1997 John Wiley & Sons, Ltd.

Whose Utility ? The Social Impact of Public Utility Privatization and Regulation in Britain (John Ernst)

Whose Utility ? The Social Impact of Public Utility Privatization and Regulation in Britain (John Ernst)