Because of the nation’s economy stressed, politicians are pressuring regulators to help make utility service “affordable.” This picture has three problems.
Wealth Redistribution just isn’t Regulation’s Department
The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. Rate design makes each customer category bear the expenses it causes. None of those cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only when we jigger the numbers—if we lower rates for the unfortunate by raising rates for other individuals. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of one class to profit another, with this exception: With taxation, citizens can retire representatives whose votes offend; however with utility service, captive customers are stuck with all the rates regulators set.
Instead of shifting costs between customer classes, regulators might redistribute wealth in different ways: by “taxing” shareholders, for example., reducing shareholder returns underneath the otherwise level that is appropriate. But taxing shareholders isn’t any more the regulator’s domain than is taxing other customers. And it’s really likely unconstitutional: Having invested to serve the general public, shareholders expect “just compensation,” undiminished by a forced contribution for affordability.
Moving money among citizens is important to a society that is fair. Poverty is intolerable and charity that is private suffices, so government steps in. […]