Terzic on Strategy

Tired, Rehired and Fired
By Branko Terzic, Deloitte Services, LP

A few years ago John Rowe, CEO of Exelon, shocked the attendees at the National Association of Regulatory Utility Commissioners (NARUC) annual convention by asserting that today, “the opposite of markets is politics.”

That’s not the way the 118-year-old organization has presented its raison d’etre. From its inception, the National Association of Railroad and Utility Commissioners NARUC has stood for the proposition: “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 and industry experts. One of the architects of this scientific regulation, Wisconsin Gov. Robert La Follette, writes 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 (in 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 railroad and utilities.” Now that’s an innovative idea, regulatory commissioners who can actually establish the “cost of service.”

What is the status of regulation today? Perhaps surprisingly, 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 been negatively 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 column, “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 1980s era commissioners brought out of retirement by the governors of Ohio and Pennsylvania to provide proven expertise and judgment to the regulatory agencies in those states.

And “fired” refers to the current members of the Maryland Public Service Commission whose positions were eliminated by a state legislature. The law establishes 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 1980s, when state regulators were under political pressure for increasing rates to accommodate a period of double-digit inflation and interest rates. In their response to the issue, a few state legislatures decided to solve the problem of perceived regulatory deficiencies by 1) changing the names of the agencies, 2) increasing the number of commissioners (either from three to five or five to seven), or 3) eliminating certain regulatory practices from the regulators’ toolbox. In the end, regulation still had to work and remain within the mandates of the US Supreme Court’s decisions regarding “fair return” and “just and reasonable rates.”
Caveat emptor.

Branko Terzic, a former utility CEO and FERC commissioner, is global and regulatory policy leader in energy and resources at Deloitte. He can be reached at bterzic@deloitte.com. Terzic is a regular contributor to New Power Executive.