Revisiting the Public Good, Part 2: What Do We Mean by “Good”?
Simple terms can provide a useful framework and help us understand complex things. Raising children, for example, is a highly involved, lengthy and expensive undertaking, but can be reduced to a couple of words: You want your kids to grow up to be strong and kind. Utility regulation is no different, even utility regulation in 2020 during the COVID-19 pandemic. A regulator’s complex, detailed and challenging work boils down to ensuring the “public good.”
Regulators’ complex, detailed and challenging work boils down to ensuring the “public good.”
Of course, nothing is quite that simple. For example, adding to a regulator’s many challenges during the pandemic that we are facing is a climate imperative. If world economies continue to perpetuate climate change, the chances are we will continue to experience wildfires, flooding, drought, intense summer heat, violent storms and other significant weather events. This will probably affect ecosystem integrity and in turn, food production, public health and political stability — all outcomes bound to reverberate around the globe. While Mother Earth News makes these arguments, so does the Department of Defense.
Our continued reliance on fossil fuels also degrades our air quality. Our failure to limit harmful air emissions apparently produces disproportionately greater effects on poorer Americans and those of color who are more directly exposed, and whose health in general is already compromised due to limited access to the benefits many of us take for granted like health insurance, adequate housing, healthy food, clean air and clean water.
When regulators review, condition and determine that a utility project or policy is in the public good, the principles and challenges that underlie determining the “good” should be fairly well known, even if securing the results, especially today, can be time-consuming and arduous. At the heart of what it takes to ensure the “good” part of public good is the concept captured in NARUC’s 1989 Resolution in Support of Incentives for Electric Utility Least-Cost Planning, which urges NARUC members to “ensure that the successful implementation of a utility’s least-cost plan is its most profitable course of action.” This requires regulators to harness and direct the private motivations of firms on behalf of the public. And this first means answering one basic question: “How does the utility produce net income,” or more plainly, “How does it make a profit?”
Effective regulators take the time to understand how a utility makes net income and how its private interest squares with the public interest. For example, increased electricity sales serve its private interest and benefit its shareholders and management. Going a bit deeper, regulators may find that the effect of existing regulations and accounting practices yields the counterintuitive result of off-peak sales being less profitable than on-peak sales. With that understanding, regulators are positioned to amend existing practices to harmonize the utility’s private goal with goals that are more beneficial to the public. In this case, they could adopt reforms that make it profitable when a utility helps a consumer shift on-peak use to off-peak times, which might be less wasteful, less polluting and less expensive.
Allowing the company to share consumer savings from customer energy efficiency programs would be another way for the utility to produce broad consumer and utility system benefits, but to also more narrowly benefit itself. “Make-ready” arrangements for electric vehicle charging, another example, can provide a return to the utility while helping promote a public policy adopted by many states to reduce economic barriers to greater EV deployment.
Harmonizing public and private interest is utility regulation’s sweet spot.
Each of these examples illustrates where a regulator can harmonize public and private interest. This is utility regulation’s sweet spot. It is central to ensuring that the “private good” motivations that naturally drive a utility company’s behavior become more closely aligned with the needs of the public. Thus, for regulators to ensure the “good” in “public good” means answering the question, “How can the utility make net income by doing the things that the public — not the firm alone — but the public wants and needs?”
Even as the utility sector transitions and brings forth challenge after challenge, it is useful to remember that at the heart of utility regulation is the need to recognize and secure the public good.