Economic Death Spirals: Part I

By

Dave Harbour

Economic Death Spirals are never pleasant and can vary in impact.  As a former utility regulator, I was always on the lookout for potential utility death spirals, for their impact could bankrupt utility investors, make utility rates unaffordable for consumers and/or threaten the lives of those dependent on life sustaining heat, light, water and sanitary services. 

A utility death spiral can strike when rates become too high for consumers to afford.  In such a case, fewer consumers can pay for the service.  As customers leave the utility or use less of its service, overall utility costs increase because they are borne by an increasingly smaller number of remaining customers.  Ultimately, there could be a very few customers paying such a high price that the utility and its investors have to call it quits.  The utility death spiral is one form of economic, “death spiral”.

Having become acquainted with the tragic consequences of potential and some actual economic death spirals, I now apply the concept to a variety of personal and public policy situations—some of which will be of value to our Alaskan and Canadian readers coping with big energy projects.

The Traditional Utility Death Spiral

An honest regulator today must be very frustrated.   By 'honest' we mean public servants committed to just and reasonable adjudication of utility rates based on facts and evidence in the record before them…not on personal political instincts or outside pressure.  

The concept of "global warming" became de rigueur, beginning about two decades ago, then morphed into "global climate change" when in more recent years science could not sustain the theory of "warming".

I'll explain.

It is hard for ordinary, hardworking citizens to believe but we have shown in these pages that "climate change" is a political technique for defeating capitalism and organizing communities to achieve power.

To use climate change to achieve power and defeat capitalism, the manipulators — the strategic planners pulling the strings — have perverted the rule of law in a number of areas which we have also reviewed in these pages. 

But today, we'll address the manipulation of the utility regulatory process. 

Here is the general, trustworthy, reliable process of utility regulation with which I became familiar as a regulator. 

A regulatory utility agency is created by the Legislature with quasi-judicial and quasi-legislative powers.

In its quasi-judicial role, it adjudicates utility rates, assuring that they are 'just and reasonable' for consumers and give utilities the 'opportunity but not the guarantee of achieving a fair return of and on their investments.'  Final decisions are adjudicated in private to assure a candid internal debate of merits and of the record but are subject to appeal both by the agency then by the judicial system.

In its quasi-legislative role, it may be given the power to promulgate regulations, rules established consistent with statutes passed by the Legislature.  Regulations have the force of law but are created after a proposal is submitted for public review, public comment is considered.  The overall record is generally adjudicated and voted on in public.

The regulator may grant a utility a monopoly service area in return for having its operations regulated by the agency.  That agency will issue a certificate of public convenience and necessity in return for the utility’s commitment to provide dependable service within its certificated area.  The regulatory entity then monitors operations and hears complaints and adjudicates requests for consumer rate increases – using a “just and reasonable” standard. 

In short, regulation of the monopoly utility becomes the surrogate or replacement for a competitive market.  (Note: in the case of utilities, most people wouldn’t want telephone poles constructed by six different companies, or six sets of sewer pipes or water pipes or natural gas distribution pipelines or six garbage collection companies serving various neighborhood customers at 5 a.m., six days a week.) 

Most customers would rather have a government regulated utility monopoly, overseen to assure that the rates for the service are, “just and reasonable,” as if there were a competitive marketplace.

In the case of regulated utilities that are privately owned, the regulator decides whether costs were ‘prudently incurred’ and then has to decide using the ‘just and reasonable’ standard whether the rate payers should be charged the additional monthly rate, or whether investors, or shareholders, should ‘eat’ the increase. 

But another regulatory principle is this: while assuring that the proposed rate increase is just and reasonable, it does so from both the perspective of the utility and the rate payer.  That is, if costs are high but prudently incurred, the regulatory should also be mindful that the utility investors should be protected as well, for it is in the consumers’ interest and in the general public interest to assure that utility investors have the opportunity – but not the guarantee – of making a reasonable return on their investment.

To not be as mindful of a just and reasonable utility cost increase could be to jeopardize the financial ability of the utility to survive. 

More coming….

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska and a Commissioner Emeritus of the National Association of Regulatory Utility Commissioners (NARUC).  He served as NARUC's official representative to the Interstate Oil & Gas Compact Commission.  Harbour is past Chairman of the Alaska Council on Economic Education, former Chairman of the Anchorage Chamber of Commerce, and past President of the American Bald Eagle Foundation.  He is Chairman Emeritus of the Alaska Oil & Gas Congress.