Public utilities regulation has expanded its domain far beyond its original mandate and what is socially optimal. The original mandate confined itself to setting “just and reasonable” rates and acting in other ways that improve the long-term welfare of utility customers. The idea was to protect customers from “monopoly” utilities setting high rates and providing poor service. Today, as regulators pursue other goals driven by escalating politics, they inevitably compromise on that original mission.

According to most state statutes, regulators must assure the public that utility rates are just and reasonable and not unduly discriminatory. Those requirements demand that consumers pay no more than necessary to give a prudent utility a reasonable opportunity to recover efficiently incurred costs, including a “fair return” on investment.

Around the early 1990s, state regulators and legislatures began requiring utilities to widen their sphere to include subsidizing low-income households. Subsequent expansions in authority included accommodating, facilitating, and even subsidizing utilities’ competitors (e.g., retail solar providers and other forms of renewable energy); investing in politically popular technologies; promoting energy efficiency; and achieving clean air/​climate change targets beyond federal and local mandates. Those demands on utilities have escalated their costs, hindering their ability to operate as profitable entities providing basic services reliably and economically.

A major part of the current policy debate on utilities regulation centers on the utility business model, addressing — among other things — the extent to which utilities should broaden their activities to satisfy society’s demands driven by political forces. An expansive role for utilities has led, for example, to higher electricity prices along with the compromise of traditional regulatory objectives like cost-based rates, consumer protection, least-cost utility operations, and adequate service reliability. California is the poster child for this development, although other states have also gone down this primrose path.

Perhaps ironically, utilities themselves may be complicit in broadening their social responsibility for the purpose of goodwill/​publicity that they hope will lead to favorable treatment from regulators and other governmental entities. Utilities increasingly become strong proponents of subsidized energy efficiency programs and clean-energy technologies in the absence of a rigorous demonstration that these are in the best interests of their customers.

Stakeholder capture / The growing politicization of public utilities regulation reflects, above all else, efforts by stakeholders to capture the benefits of governmental actions. This has negative repercussions for regulation as an institution. First, it means more special-interest influence with additional stakeholders having motives to co-opt the public interest.

Second, regulator emphasis shifts to short-term (i.e., myopic) or non-economic effects. The long-term welfare of consumers takes a back seat to other considerations. One outcome is the promotion of new capital projects on the basis of their non-cost attributes. With greater politicization, regulators have increasingly stressed the effects on the environment, climate, job creation, economic development, and other outcomes. This complicates regulators’ job of making the inevitable tradeoffs to advance the public interest. It also likely results in less concern for customer welfare as other objectives become integral to regulators’ decisions.

Third, politicization makes it more difficult for regulators to execute the long-standing “balancing act” of reconciling utility and consumer interests with the advancement of politically popular objectives. The increase in stakeholders has complicated the regulator’s task to achieve a balanced outcome. How do regulators sum and weigh those interests in advancing the public good? The public interest takes on more obscure interpretations when special interests become more diverse and greater in number: it is harder to define and know when it improves.

Fourth, politicization inevitably results in wasteful rent-seeking costs. Public utilities regulators are vulnerable to efforts by advocates of special interests to achieve self-serving outcomes at the expense of the general public. Either for ideological or monetary reasons, these groups want to shape the future, and the sooner the better. Their vision of the future would fill their pockets or satisfy their political agenda. The electric industry in particular has several features making it highly visible and susceptible to politics and interest-group lobbying. Among them are having a substantial environmental footprint, being a large user of energy, providing an essential service, and yielding a high social cost from service interruptions.

Fifth, politicization increases the likelihood of subsidies and the socialization of costs for new investments. Subsidies can cause substantial damage by being unfair to funding parties (namely, utility customers), economically inefficient, and unfair to competing energy sources. One bizarre yet common practice is for electric utilities to subsidize their customers to use less of their core service via energy efficiency initiatives and to subsidize their competitors under regulatory mandates and distorted ratemaking practices. Overall, subsidies almost always fail a benefit–cost test from a societal perspective.

One salient illustration of harmful politicization is the question of how much competition should be allowed in traditionally monopolistic markets. Regulators and interest groups often form an agreement with utilities to address the challenges posed by increased competition by suppressing it. Regulation itself has been a major reason for utility monopoly power because of its practice of limiting entry even when economic, technological, and market conditions would warrant opening up the market to competition.

Balancing objectives / Regulators should ask themselves whether utilities customers are getting the short end of the stick. Are customers funding the advancement of political objectives through inflated rates without compensatory benefits? The term “turkey stuffing” aptly describes the situation where utilities keep fastening surcharges to a typical customer’s bill to fund investments and other activities, the benefits of which often largely accrue to others, including fringe interests with some form of political leverage.

Regulators face the challenge of balancing the objectives of keeping prudent utilities financially healthy while fostering a broadened social agenda. One could rightly ask whether utilities more closely resemble public agencies than private entities driven to serve only their shareholders and customers. One could also question whether funding political mandates through utility rates best serves customers. Regulators should stand back and conduct a reality check when thinking about the proper role for utilities in a society that highly values affordable and reliable utility services.

To be fair, regulators are not the sole culprit for the extreme politicization that is threatening the interests of utility customers. Legislative actions set the framework for regulatory actions that often restrict the ability of regulators to serve the public interest. Politics typically propels these actions, with special interests unduly influencing the legislation. We have seen utilities, environmentalists, new market players, and other special interests going to state legislatures for favors after failing with regulators. Their intent is to promote their agenda, not society’s interest.