Regulating Public Utility Performance The Law of Market Structure, Pricing and Jurisdiction Scott Hempling

Transcription

1 Regulating Public Utility Performance The Law of Market Structure, Pricing and Jurisdiction Scott Hempling Regulatory Law: Purposes, Power, Rights and Responsibilities Market Structure: From Monopolies to Competition Who Can Sell What to Whom? Pricing: How Much Can Sellers Charge and Who Decides? Jurisdiction: State, Federal and Future The Traditional Utility Monopoly Authorizing Competition Making Competition Effective Monitoring Competition for Anticompetitive Behaviors "Just and Reasonable" Prices in Non- Competitive Markets: Cost- Based Rates Set by the Regulator "Just and Reasonable" Prices in "Competitive" Markets: Market-Based Rates Set by the Seller Discrimination: When Is Favoritism "Undue"? Filed Rate Doctrine: The "Rate on File" Is the Only Lawful Rate Retroactive Ratemaking: The Prohibition and the Exceptions Mobile-Sierra Doctrine: When Does Contract "Sanctity" Give Way to Government- Ordered Amendments? The Federal State Relationship Jurisdiction's Future Purposes of regulation Exclusive retail franchise Historical summary Effective Competition: Definitions, goals and metrics Anticompetitive pricing The ratesetting equations Seller-set prices can be "just and reasonable" if seller lacks market power Undue discrimination Filed rates: Purposes and principles Three bases Principle: The commission cannot let parties out of their contracts Limits on federal action Market Structure Purposes of regulatory law Obligation to serve Eliminating the legal monopoly at retail Unbundling: Reducing the incumbent's control of "essential facilities" Tying What does "just and reasonable" mean? The courts speak: To prevent market power, regulators must screen and monitor Due discrimination Commission decisions constrain courts Four Illustrations The "public interest" exception Limits on state action Pricing Subjects and sources of regulatory law Consent to regulation Constitutional questions Reducing non-facility entry barriers Market manipulation Imprudent Actions and inactions: Who bears the costs of inefficiency and waste? The agencies act: Techniques and procedures for screening and monitoring Cost allocation within holding company systems Federal commission decisions constrain state commissions Seven exceptions One standard with a rebuttable presumption Regulating within the limits: Six models of federalstate interaction Federal-state jurisdictional relationships Quality of service Rethinking separation Prudent actions but uneconomic outcomes: Who bears the cost of bad luck? Are scarcity prices just and reasonable? Commission must respect its own rates Three ways to preserve the regulator's role Corporate structure and changes in control Eminent domain Variations on cost bases The future of market-based rates Application to marketbased rates Escape from the presumption: Fraud, duress, illegality Limit on negligence liability Departures from cost bases Application to antitrust law Special applications Application to non-rate terms and conditions Fraud does not block the filed rate defense

2 Regulatory Law: Purposes, Power, Rights and Responsibilities Purposes of regulation Purposes of regulatory law Subjects and sources of regulatory law Economists: Exploit economies of scale, address market imperfections Powers Subjects Residential customers: Protect us from abuse Responsibilities Sources Industrial customers: Set rates so we can compete globally Rights Shareholders: Give us a chance for a fair return Procedures Lenders: Ensure cash flow sufficient to pay off debt Competitors: Lower entry barriers, give us a shot Environmentalists: Limit environmental damage 1

3 The Traditional Utility Monopoly Exclusive retail franchise Obligation to serve Consent to regulation Quality of service Eminent domain Limit on negligence liability Exclusivity express in statute Seven variations on exclusivity Franchise revocation Regulatory options for franchise accountability The antidiscrimination objective Statutory bases Components of quality: Traditional and new Regulatory requirements Power, purposes and limits General limitation and its justifications New service offered by non-incumbent Revocation authority The citizen access objective Legal sources: Rules, statutes and orders Public private overlap Parties and defenses Customer selfservice Revocation justifications The economic development objective Types of regulatory requirements: Inputs and outcomes Federal roles Exceptions to the general rule Group selfservice Limits on the obligation to serve Remedies: Financial penalties and directed actions No immunity: Gross negligence Adjacent monopolies as rivals: Locational and fringe competition Contracts that undermine the obligation The management prerogative constraint Federal state relations Exclusive franchise for a specific service Competition for the exclusive franchise No statutory exclusivity 2

4 Authorizing Competition Historical summary Eliminating the legal monopoly at retail Constitutional questions Electricity Exclusive franchise Obligation to serve Consent to regulation Quality of service Power of eminent domain Limited liability for negligence Definitions: Sunk costs and future profits Shareholder expectations of future profits Shareholder expectation of sunk cost recovery Concluding constitutional thoughts Gas Type of seller Contract precluding competition Takings Clause Case law Policy outcomes Telecommuni cations Type of technology No contract precluding competition Electricity sales at wholesale Three variables Electric sales at retail Natural gas pipelines Telecom Contract Clause 3

5 Making Competition Effective Effective Competition: Definitions, goals and metrics Unbundling: Reducing the incumbent's control of "essential facilities" Reducing non-facility entry barrier Definitions of competition Unbundling defined The antitrust foundation Statutory foundation: The prohibition against "undue preference" Unbundled rates for competitive neutrality Separation to reduce temptation Unbundling's effects on vertical economies New bottlenecks and new tensions Entry barriers defined Product promotion advantages Entrenched customer preferences Long-term contracts Entry barriers in regulated utility markets Goals of competition Monopolists may not monopolize Gas and electricity at wholesale Cost unbundling Functional unbundling Electricity's ancillary services and efficiency losses Broadband Changing suppliers Effective competition: Meanings and measurements Essential facilities doctrine: Origins Gas and electricity at retail Total element long-run incremental cost Corporate unbundling Gas marketing data Smart grid Monthly billing Essential facility examples Telecommun ications Codes of conduct Telecommunic ations: From alien attachments to broadband Knowledge of the customer base Incumbent s refusal to share: Business justifications Limits on incumbent s obligation to share facilities Transfer of control to independent entity Incumbent's name Antitrust's role in utility regulation Divestiture 4

6 - Monitoring Competition for Anti-competitive Behaviors Anti-competitive pricing Tying Market manipulation Rethinking separation Price squeeze Definition and examples Sufficient competition scenario Predatory pricing "Technology tying" in utility industries Insufficient competition scenario 5

7 "Just and Reasonable" Prices in Non-competitive Markets: Cost-Based Rates Set by the Regulator The ratesetting equations What does "just and reasonable" mean? Imprudent actions and inactions: Who bears the costs of inefficiency and waste? Prudent actions but uneconomic outcomes: Who bears the cost of bad luck? Variations on cost bases Departures from cost bases Statutory purpose: Seller and buyer interests Constitutional constraint: The Takings Clause Regulatory discretion under the "just and reasonable" standard Roles of legislature, commission and court Prudence principles Imprudent actions Imprudent inaction Defense against disallowance: The "management prerogative" Burdens of proof on prudence and imprudence Financial consequences of cost disallowance Prudence does not guarantee cost recovery Area rates Is the departure necessary to carry out a statutory purpose? Regulator's duty: Honor shareholders' legitimate expectations Limits on shareholders' legitimate expectations Poor performance relative to objective indices The imputation solution General rule: Rebuttable presumption of prudence Three points on the riskassignment spectrum Price caps How does the rate compare to cost? Substantive expectation: Opportunity to earn fair return Failure to use reasonable management practices Imputation analogy: Who gets the gain on sold-off capacity? Deference to utility expertise Four limits on regulatory actions Alternative form of regulation Loosening the connection between rate and result Procedural expectation: Opportunity for hearing Failure to oversee contractors and employees Failure to secure remedies against erring supplier Failure to heed official criticisms 6

8 "Just and Reasonable" Prices in "Competitive" Markets: Market-Based Rates Set by the Seller Seller-set prices can be "just and reasonable" if seller lacks market power The courts speak: To prevent market power, regulators must screen and monitor The agencies act: Techniques and procedures for screening and monitoring Are scarcity prices just and reasonable? The future of market-based rates Paths to regulatory withdrawal The obligation to screen Screening sellers Monitoring sellers and punishing violators Wholesale electricity: Sellerby-seller review The obligation to monitor Market power screens: Horizontal and vertical Other entry barriers Affiliate transactions Horizontal market power Vertical market power 7

9 Discrimination: When Is Favoritism "Undue"? Undue discrimination Due discrimination Cost allocation within holding company systems Rate differences not justified by cost differences Different customer profiles Systems that plan and operate utility assets centrally Rate differences with anti-competitive effect Different settlement strategies and contract histories Systems that mix utility and non-utility businesses Price discounting to retain customers Product differences 8

10 Filed Rate Doctrine: The "Filed Rate" Is the Only Lawful Rate Filed rates: Purposes and principles Commission decisions constrain courts Federal commission decisions constrain state commissions Commission must respect its own rates Application to market-based rates Application to antitrust law Application to non-rate terms and conditions Fraud does not block the filed rate defense Federal courts Antitrust and contract damages unavailable State courts "Retroactivity" allowed if seller has violated a market rate condition 9

11 Retroactive Ratemaking: The Prohibition and the Exceptions Three bases Four illustrations Seven exceptions Statutory basis Tax payments lower than estimates Regulatory "notice" Constitutional basis Tax depreciation differences Utility "deferral" of expenses Policy basis "Direct billing" of gas production costs Affiliate transactions Someone else's cost Hard-to-predict costs Commission selfcorrection Judicial reversal of commission rate decisions Disgorgement of illegal gains 10

12 Mobile-Sierra Doctrine: When Does Contract "Sanctity" Give Way to Government- Ordered Amendments? Principle: The commission cannot let parties out of their contracts The "public interest" exception One standard with a rebuttable presumption Three ways to preserve the regulator's role Escape from the presumption: Fraud, duress, illegality Special applications Market-based contracts Non-signatories Application to tariffs 11

13 The Federal State Relationship Limits on federal action Limits on state action Regulating within the limits: Six models of federal state interaction Commerce Clause Tenth Amendment Agency statutory authority Dormant Commerce Clause Supremacy Clause Bright line divisions Federal enlists state State enlists federal Joint boards Regional compacts Overlapping jurisdiction Within Congress's Commerce power Discrimination Express preemption Occupation of the field preemption Conflict preemption The presumption against preemption Interstate intrastate Outside Congress's Commerce power Burden In general Retail wholesale State review of retail utility purchases under FERCjurisdictional contracts Bundled unbundled Local distribution and bulk power system 12

14 Jurisdiction's Future Market structure Pricing Federal state jurisdictional relationships Corporate structure and changes in control Evaluating alternative arrangements Interdependencies Defining obligatory service Obligation to serve Universal service Infrastructure readiness Other features 13