Regulators: Tired, Rehired, and Fired
By Branko Terzic
Some years ago, the late John Rowe, then CEO of Exelon, shocked the attendees at the National Association of Regulatory Utility Commissioners (NARUC) annual convention by asserting that at that time “The opposite of markets is politics.”
That is not the way this long established and venerable organization had presented its raison de etre. From its inception in 1887, as the National Association of Railroad and Utility Commissioners, the NARUC has stood for the proposition that “The opposite of markets is regulation.”
So, what is the difference one might ask?
Just this. The regulation of monopoly railroads and other “public utilities” was supposed to be done by independent regulatory agencies staffed with subject matter and industry experts. One of the architects of this “scientific regulation’ Wisconsin Governor Robert La Follette wrote in his autobiography “I have always advocated the appointive method of filling places requiring the services of trained experts.” Yes, the individual members of these regulatory agencies were to be “trained experts” when appointed, not when they left the agencies. As La Follette discussed his first appointments (1903) he explained that “I felt that the state should have the best experts in the country in these positions, whether residents of Wisconsin or not…”
La Follette, later looking back over the first decade of operation of the Wisconsin commission, considered the question “How has it been possible that both the people of Wisconsin and the investors in public utilities have been so greatly benefited by this regulation”. The answer, he wrote, “Simply because the regulation is scientific.” Because the appointees were experts the “…commission found out through its engineers, accountants and statisticians what it actually costs to build and operate the road and utilities.” Now that’s an innovative idea, regulatory commissioners who can actually establish the “cost of service.”
So, what is the status of regulation today?
Perhaps, surprisingly, I would say that the current cadre of state regulators is better educated and more prepared than some would expect. The problems have not been necessarily in the quality of the appointments (or elected regulators) but the performance of regulators. This performance in some regards has negatively been affected by the level of pressure, even abuse, at the hands of unlikely sources such as the governors making the appointments or some legislators within the states.
Now to explain the title of this week’s the title “Tired, Rehired and Fired”.
The “tired” refers to the Illinois Commerce Commission Chairman who resigns to accept a serve-at-the-pleasure appointment from the same governor who appointed him to a fixed, read “independent”, term as ICC commissioner and Chair.
The “rehired” refers to the veteran 1980’s era commissioners brought out of retirement by the Governors of Ohio and Pennsylvania twenty years later to provide proven expertise and judgment to the regulatory agencies in those states.
And finally, “fired” refers to the members of the Maryland Public Service Commission whose positions were eliminated by a state legislature. The law established a new regulatory body, where the Governor can only make appointments from a list submitted by leaders of the two legislative houses.
This last action reminds me of the inflationary 1980’s when state regulators were under political pressure as regulators increased rates to accommodate a period of double-digit inflation and double-digit interest rates. In their response to the rising rates issue, a few state legislatures decided to solve the problem of perceived regulatory deficiencies by
- changing the names of the agencies, under the assumption that the name “public service commission” stood for the function of the agency rather than the “public service companies” which were being regulated
- increasing the number of commissioners (either from 3 to 5 or 5 to 7), under the assumption that the originals were doing a bad job, so more were needed and or
- eliminating certain regulatory practices from the regulators’ toolbox, such as automatic fuel adjustment clauses, or CWIP in rate base.
In the end, regulation still had to function and remain within the mandates of the US Supreme Court’s decisions regarding “fair return” and “just and reasonable rates.”
Caveat emptor.
BT Note: This article originally appeared in New Power Executive newsletter issue September 1, 2006
The Honorable Branko Terzic is a former Commissioner on the U.S. Federal Energy Regulatory Commission and State of Wisconsin Public Service Commission, in addition to energy industry experience was a US Army Reserve Foreign Area Officer ( FAO) for Eastern Europe (1979-1990). He hold a BS Engineering and honorary Doctor of Sciences in Engineering (h.c.) both from the University of Wisconsin- Milwaukee.
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