Scott Hempling, NRRI Executive Director March 2008

Legislatures delegate powers to commissions. Delegation requires decision: Which problems are best addressed by the legislature, which by the commission? Regulatory statutes often answer this question suboptimally. I discuss three examples and three common causes. I then derive some principles for effective legislature commission relations.

Three Examples

Income inequity:   For low-income citizens, cost of service exceeds ability to pay. Absent legislative response, conscientious regulators allocate more fixed costs to variable charges, thus cutting bills for low usage customers. Economists argue that the recovery of fixed costs through variable charges lowers efficiency, reducing resources for all. Performing the political function of wealth redistribution diverts regulators from their duty to induce efficient performance. Is this conflict necessary, or could a different legislative regulatory relationship improve the result?

Pollution:  Electricity production pollutes. The cause of electricity production is electricity consumption. Consumption would pollute less if the consumer's price reflected pollution's cost. But regulators receive conflicting pressures: reduce pollution, keep prices low. The conflict reflects more mixing of political with technical. The political question is: What is the consumer's responsibility to bear the costs of his consumption? If legislatures provide the political answer, commissions then can deploy their technical expertise crafting rate designs, efficiency programs and other mechanisms that minimize the cost of the politician's decision. Legislative silence draws the commission into a political role, diminishing its credibility as technical problem solver and truth teller.

Market structure:   How does a legislature authorize competition after decades of monopoly? Competing for attention are multiple bases for decisionmaking: ideology (markets or regulation?); political expediency (by election day, will prices rise or fall?); pressure group placation ("stranded cost" recovery for incumbents? high "shopping credit" to help new competitors? price capped service for non shoppers?); and, facts (do economies of scale, reliability, efficiency, increase or decrease with de integration?).

Industry structure must serve industry purpose. Industries serve customers. Whether a given industry structure will serve customers well is a factual question. Answering factual questions requires objectivity and openmindedness. Ideology, expediency and placation belong at the margin. When deciding an industry's structure, what then is the best mix of legislative and commission powers? Just as the legislature created the utility's rights and obligations a century ago, so must the legislature initiate re examination. By what process? Should the legislature change the structure itself, or should it delegate the desirability of change decision to an expert commission?

I would draw the political technical boundary as follows: The legislature makes the political judgment that a century old structure requires revisitation. The commission makes the technical judgments about which new structures work best. In retail electricity competition, most state legislation blurred these lines. Legislatures made political declarations that "competition" best served the public, then translated those declarations into fixed starting dates. But the workability of such declarations depended on technical facts facts about economies of scale, reliability and readiness. The spottiness of effective retail competition shows that legislatures are not well suited to determine, and calibrate policies to, technical facts.

Three Causes

Legislative staff resources: Recurring subjects like budget, taxation, education, health care and public safety have permanent legislative staff. Because utility legislation arises infrequently, staff faces steep learning curves.

High political component: With a modest push from interest groups, technical regulation slips easily into zero sumsmanship: shareholder vs. ratepayer, economy vs. environment, incumbent vs. newcomer, residential vs. industrial, technocrats vs. equity advocates. Since legislators specialize in compromise, they find ways to make a majority. But like a house's concrete foundation, regulation's technical foundations reliable service, economic efficiency, performance standards do not gain strength from political balancing.

Short term stimuli: Utility planning is long term, but legislative stimuli are often short term: a rate increase looms, an infrastructure weakness is discovered, some existing regulatory practice bothers someone. This mismatch produces short-term fixes not well connected to long term missions.

Two Principles for Effective Legislature Commission Relations

1. Align responsibilities according to comparative advantage. Legislatures make the big tradeoffs. They establish the exchange rate among competing values, interest groups, and time periods. Guns vs. butter, schools vs. manufacturers, and today vs. tomorrow are legislative judgments. Regulators are better at the technical judgments: defining efficient performance, calibrating rewards and penalties to produce that performance, quantifying tradeoffs, and identifying solutions that avoid tradeoffs. Regulators also design procedures that produce objectivity the engineering, accounting and finance objectivity supporting the public's expectation that lights will turn on, water will flow and phones will ring.

2. Make the legislature commission relationship a team relationship. Since the legislature creates and empowers the commission, oversight is inevitable. But the effective legislature commission relationship is less supervisory than cooperative: shared goals, coordinated action, mutual trust and two way critique.

Shared goals require a shared definition of the public interest: a common view of that combination of economic efficiency, sympathetic gradualism and political accountability (see the essay of October 2007) that best serves the community. Coordinated action and two way critique means the two bodies must determine who does what best (with emphasis on separating political from technical). If a legislature wants the commission to implement competition, but the commission finds that high economies of scale or technical impracticalities make competition inefficient, the commission should say so. If the legislature caps default service at a below market price, the commission should explain how such distortion kills competition. The legislature should expect and invite these critiques. If the statute requires that mergers satisfy the long term public interest but the commission approves mergers based on short term rate freezes, the legislature should say something. That's two way critique; that's teamwork.