Regulatory Basics

Question 1

History

Answer 1

A. Began with no regulation; First regulators came at the state level – Wisconsin led anti-trust movement (1907)
B. This is still intact at state level (rate formula)

Question 2

Economic Basis for Regulation

Answer 2

Natural Monopoly

Question 3

The Legal Basis for Regulation

Answer 3

Public Utility

Question 4

Constitutional Basis for Regulation

Answer 4

(1)Munn (1876): The Fourteenth Amendment does not require a private business, in which the public has a significant interest, to be compensated for losses it incurs due to government regulation.
- There have been a lot of “public interest” businesses that were regulated in the CL

(2)Nebbia (1934): The DPC does not prevent states from enacting economic polcies (such as price regulations) as long as they are not unreasonable or arbitrary.
- Court saying that the federal government is not going to get involved in state economic policy.

Question 5

Takings & Regulatory Basics

Answer 5

(1) Not really a taking
A. When rates get too high, we are worried about policy
B. When rates get too low, we may get worried about a taking from investors. (lurking problem)

Question 6

Five Goals of Ratemaking

Answer 6

(1) Capital Attraction – getting investors to invest in the utility
(2) Reasonably Priced Energy – want to keep energy prices low as a matter of national energy policy
(3) Efficiency – rates are set so that the utilities can stay competitive with other firms with similar financial risks
(4) Demand Control or Consumer Rationing –

• Declining block rate – consumers pay less as they consume more electricity.
• Inverted block rate – consumers pay more as they consume more electricity

(5) Income transfer – literally just soft socialism

Question 7

Ratemaking Formula

Answer 7

R = O + B*r

Question 8

R

Answer 8

Revenue Requirement - the amount that the utility is allowed to collect

Question 9

O

Answer 9

Operating costs (fuel & labor) (and maybe advertising and charitable donations)
- Every single one of these things are going to go before the commission, and they will decide whether or not they will go into the O
- Little bit of litigation

Question 10

B

Answer 10

Rate Base
a lot of litigation

Question 11

r

Answer 11

Rate of return on investment
- a lot of litigation
- Usually, utility commissions set the rate of return higher than what the market rate is.

Question 12

Statutory Limitations on Rates

Answer 12

Rates must be “just and reasonable”

Question 13

Constitutional Limitations on Rates

Answer 13

(1) Smith v. Ames: The basis for determining the reasonableness of rates for rail service must be the fair value of the property being used for the convenience of the public.
(2) Brandeis critiqued the fair value test.