Sunday, November 12, 2006

The Maryland PSC and Regulatory First Principles

A story in the November 11 edition Saturday's Washington Post begins: "The Maryland Public Service Commission could be on their way out when a new governor and legislature take office...." The import of the story is that new governor-elect Martin O'Malley and the Democrat-controlled legislature will resume the campaign to oust all of the current members of the PSC and replace them with regulators more to their liking.

This is not a good idea for several reasons, which I have testified and written about here, here, and here. Now that the political season is over--and, really, were electricity rates and replacing the PSC big political issues anyway?--calmer heads should prevail. Before taking any rash actions the new governor and the legislature should hold balanced hearings which will provide a basis to carefully consider the following:

  • Legislative action to force the resignation of all members of a regulatory body because of disagreement with a particular regulatory action or actions is virtually unprecedented in American regulatory history. There is a reason why this is so. Commissions like the PSC were established with the idea that they would bring specialized technical and economic expertise to the complexities of utility ratemaking. And they were also established in a way that would allow them to do their work largely free from overt day-to-day political interference. If the legislature decides to fire all the PSC commissioners because it doesn't like a decision, the notion that the commission's decisions will be based upon the application of specialized administrative expertise rather than politics will be severely compromised.

  • The stability that is a necessary hallmark of any principled rule-of-law regime also will be compromised by precipitous legislative action dismissing the entire group of PSC commissioners. Without a certain degree of confidence in the stability of the legal regime that governs utilities subject to the PSC's jurisdiction, these regulated companies will be reluctant to undertake the investments and pursue the innovations necessary to meet future demand while maintaining high levels of service quality.

  • It is important for the governor and legislature to have in mind that before the recent sizeable BG&E&E and Pepco rate increases electricity rates had been frozen since 1993. That is a very long time with stable rates. Under the electricity restructuring plan adopted by the legislature in 1999, BG&E, for example, could not raise retail rates at all until this year, even as wholesale energy prices were rapidly rising. What the new governor and legislature need to consider is not how much rates have gone up in absolute terms under the 1999 restructuring plan which introduced a measure of competition into the electricity marketplace, but rather how much in relative terms rates would have gone up under the displaced regulatory regime. The displaced rate-of-return regime was viewed by most respected regulatory economists as one that created incentives for wasteful investments and expenditures by utilities that were simply passed on automatically to utility consumers.

If done thoughtfully and deliberately, a review of the organization and structure of PSC is appropriate and useful. Indeed, in my pieces referenced above, I have suggested that a greater degree of political control of the agency may be desirable. But the way to do that, if the legislature decides to go in that direction, would be to allow the governor to remove PSC commissioners before the expiration of their terms, a power that he now probably lacks. This is more consistent with our traditional notions of separation of powers than legislative hiring and firing of regulatory agency personnel.

By the same token, it is always appropriate, of course, for the legislature to review and adopt policies to guide the PSC in its ratemaking activities. But in doing so, it won't do anyone any good--especially the consumers in whose interests it purports to be acting--if the legislature ignores the economic fact-of-life that ultimately utilities subject to the PSC's jurisdiction must recover their costs of producing their services. If they aren't allowed to remain financially healthy enterprises, all of Maryland's residential and business consumers who depend on them will suffer.