Virginia Needs to Have Its Regulator Back

This is how it’s supposed to work: Certain large industries operate best, or most efficiently, when they are provided with limited monopoly rights. Electric companies that provide local distribution service are an example.  It would not make sense to run multiple sets of wires down the street just to allow customers to choose from a number of different distribution providers. Instead, a single electric utility company is given the exclusive right to provide distribution service to customers located within its defined service territory. In order to prevent that company from overcharging its customers and making excessive profits, its rates are regulated. Well-established rate-making principles exist to ensure the utility’s rates create a fair opportunity to recover the costs it incurs in providing a service, plus a fair margin. Rates are designed to be just and reasonable from the customer’s perspective and to give the owners of the utility company a reasonable return on their investment. A regulator is charged with the duties of granting companies authority to provide utility services, assigning service territories, approving prudent investments in facilities that will be used and useful in providing service, and setting rates that are just and reasonable and that provide a fair return. In Virginia, that regulator is the State Corporation Commission (“SCC”).

For most of the last century, this “regulatory compact” worked well: Customers received safe and reliable services at fair rates, and utility companies were financially successful. In fact, utility company stocks have long been considered to be among the safest of investments. This regulatory paradigm was originally applied to vertically integrated monopoly utilities, including electric utilities, natural gas companies and telecommunication providers. A single electric utility company, for example, provided not only regulated monopoly distribution service, but also generation and transmission service on the same regulated basis. “Ma Bell,” a/k/a telephone company, was the only telecommunications provider that anybody needed or wanted. However, during the latter part of the twentieth century, and continuing to the present day, technological developments allowed certain aspects of these vertically conglomerated utility services to be supplied by multiple providers, giving customers the ability to choose the precise services they wanted at prices established by competitive markets. This encouraged even more technological innovation and greater responsiveness to varied customer needs at fair competitive prices. After all, few people today would want to be limited to a corded land-line telephone mounted on the kitchen wall.

Now here’s what should happen: As technology permits certain aspects of traditional utility businesses to be made available from multiple suppliers, those services ought to be released from monopoly limitations and rate regulation. This would foster innovation and allow fair rates to be set by a competitive market. Those aspects of utility business that are not suited to competition should remain subject to regulation by a disinterested and apolitical regulator. For perspective, this is what has primarily happened in the telecommunications industry. Highly advanced cell phones and software are now in virtually all customers’ hands, having been provided by a wide range of suppliers with services priced by a highly competitive market. However, what has actually happened in the electric utility industry in Virginia has been the exact opposite of what should have happened. Competition for electric supply service, which is broadly available elsewhere, has been greatly restricted and mostly proscribed by statute. And oversight over regulated services has, to a large extent, been removed from the jurisdiction of the utility regulator, the SCC. Instead of well-principled cost-of-service regulation, rates and services are to an alarming degree being dictated by legislation. As a result, customers are being denied services they could obtain from competitive suppliers or charged too much to obtain them from incumbent utilities. At the same time, customers are also being required to pay exorbitant rates for services that properly should be regulated, resulting in excessive profits for monopoly providers.

One problem with this situation is that the legislative process is, by its nature, highly politicized. Another problem is that the General Assembly does not have experience or expertise in the workings of regulated utility industries to make truly informed decisions. In short, the legislature is simply not designed to function as a principled regulator. The General Assembly has too many issues it needs to address in too short a time each year, while being pulled in countless directions by its many constituencies. The SCC, on the other hand, has demonstrated itself over many decades to be a principled and well-informed regulator in the several specialized utility industries over which it has had authority. While the Commissioners are selected by the General Assembly and approved by the Governor, they serve staggered six-year terms, and are not subject to the same pressures of seeking re-election and funding re-election campaigns as are legislators. Over the years, many Commissioners have come from regulatory backgrounds, and those who have not have consistently proven themselves to be fast learners. Moreover, they have the benefit of a highly regarded, experienced and expert Staff. With an objective regulator so well-qualified in place, regulation by legislation is proving to do a grave disservice to the citizens of the Commonwealth.

This is not to say that the General Assembly doesn’t have an important role to play in the regulation of public utilities, it’s just not the role of regulator. To take one important example, traditional cost-of-service ratemaking does not directly address the need to promote renewable energy alternatives to address climate change issues. Green energy policy is certainly an appropriate subject for legislation. However, once having established policy goals, legislators should refrain from dictating in detail the precise means and measures required to achieve those goals or how utility companies should be compensated for doing so. The SCC has the tools in hand to accomplish those tasks in the form of well-established and finely-tuned regulatory principles. Renewable energy objectives can be most effectively and efficiently achieved by letting the Commission do its job, while simultaneously best serving customers and fairly compensating utility companies.