Regulating Utility Efficiency “Fast and Slow” - The Current Australian Problem

Sun Oct 01 00:00:00 EDT 2017
Dr. Jeff D. Makholm

In an upcoming article in the October 2017 issue of the Wiley journal Natural Gas & Electricity, NERA Managing Director Dr. Jeff D. Makholm writes about the pursuit of a standard to evaluate efficiency by those who regulate utilities—drawing parallels to the work of Daniel Kahneman, a psychologist who won the 2002 Nobel Prize in Economic Science by questioning long-held tenets of economic theory. From Kahneman’s 2011 best-selling book, Thinking Fast and Slow, Dr. Makholm applies “fast and slow” parallels to the search among regulators for methods to judge efficiency in the provision of service by such public service monopolies. Over decades of dealing with “shifting and treacherous” rate controversies, North American regulators, steered by the US Supreme Court (itself driven by the judicial philosophy of Justice Louis Brandeis who served from 1916 to 1939), use a “fast” method, called the “prudence standard,” to judge the efficiency of expenditures on the way into utility books and records. Those who regulate the utilities that appeared after the privatization wave that started in the United Kingdom in the 1980 use a “slow” method—attempting to judge the efficiency by which the companies provide the service to their customers through what is called “price cap” regulation.

Dr. Makholm highlights the differences between “fast” and “slow” methods by reference to high-level regulated rate controversies in Australia where “shifting and treacherous” regulatory problems are on public display. From 2015 and continuing through 2017, regulators and major electric utilities have been locked in a seemingly endless fight in the courts (and before the legislature) over US$4 billion in regulated rates. Dr. Makholm concludes that such rate controversies are a thing of the past in North America, where the courts long since judged that the “certain and stable” attributes of the “fast” better served both the public and the investor-owned companies that provide utility services.

Makholm, Jeff D. (2017, October). Regulating Utility Efficiency “Fast and Slow” - The Current Australian Problem. Natural Gas & Electricity 34/03, ©2017 Wiley Periodicals, Inc., a Wiley company.